Bearings Sector 140221 Edelweiss Initiating Coverage FAG Bearing, SKF India, NRB Bearings, Timken India Sector Report.

Edelweiss Securities Limited
Shradha Sheth
+91 22 6620 3308
shradha.sheth@edelweissfin.com
Manoj Bahety, CFA
+91 22 6623 3362
manoj.bahety@edelweissfin.com
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G r o wt h Wi t h o u t
M a i n t e n a n c e
BANYAN

We are delighted to initiate Bearing sector under our mid-cap series, Banyan. Banyan signifies Growth Without
Maintenance and under the series we endeavour to present stocks not widely covered owing to low management access /
liquidity, but which possess robust long-term fundamentals and structural drivers. Considering the low management access
and long-term structural drivers, we will not release regular maintenance updates on the said stocks.

Our selection framework is differentiated in this series and not clouded by valuations alone. Some of the important
attributes of stocks under the series are:

1. Good corporate governance history

2. Healthy balance sheet with robust cash flows

3. May have low liquidity

4. Low or no management access

5. Not widely covered

6. Low institutional holding

Our latest initiation under the Banyan Series are SKF and FAG. The companies, by virtue of their dominance ~45% market
share in ball bearings segment for SKF and ~45% market share in the roller bearings segment for FAG, make them domestic
market leaders. A strong product portfolio with technology expertise make players like SKF and FAG preferred suppliers to
original equipment manufacturers (OEMs) right from the product development stage. The sector is highly diversified with
auto sector contributing 48% and industrial segment at 52% of overall sales. We perceive huge growth opportunity in
automotive segment as India becomes one of the major manufacturing hubs for global OEMs. Also, the healthy industrial
segment will reap benefits as imports get substituted with localised sales. Hence, with expected uptick in auto and
eventually industrial sectors, we expect SKF and FAG to register 26% and 31% CAGR in earnings over CY13-15E,
respectively. Companies have strong financial metrics: (1) high return ratios (average core RoCE of ~40%, core RoE of
~28%); and are (2) cash rich with net cash per shareSKF and FAG at INR105/share (17% of market cap) as on CY12 and
INR195/share (12% of market cap) as on CY13, respectively. We initiate coverage with BUY recommendations on SKF and
FAG with target prices of INR795 and INR2,022, implying upsides of 26% and 30%, respectively.

As always, we await your valuable feedback.

Regards
Nischal Maheshwari
Co-Head Institutional Equities & Head Research

Bearings
1 Edelweiss Securities Limited
Executive Summary
Executive summary
We initiate coverage on Indias bearing industry with a
positive view. We expect an uptick in cyclical driversauto
and eventually industrial sectorover the medium term,
while the structural drivers are expected to look up over the
longer term with increasing localisation of industrial bearings,
which are currently imported (32-43% of sales). High level of
technology-based differentiation achieved by players in their
respective focus areas ensures strong positioning and low competitive
intensity. A strong product portfolio with technology expertise make players
like SKF and FAG preferred suppliers to original equipment manufacturers
(OEMs) right from the product development stage. Highly diversified profile
with auto sector contributing 48% and industrial segment at 52% of overall
sales. We perceive huge growth opportunity in automotive segment as India
becomes one of the major manufacturing hubs for global OEMs. Also, the
healthy industrial segment will reap benefits as imports get substituted with
localised sales. Hence, with expected uptick in auto and eventually industrial
sectors, we expect SKF and FAG to register 26% and 31% CAGR in earnings
over CY13-15E, respectively. We initiate coverage with BUY
recommendations on SKF and FAG with target prices of INR795 and INR2,022,
implying upsides of 26% and 30%, respectively.

Secular drivers: The Indian bearings industry is driven largely by the industrial sector (52%
contribution) and automobiles (48% contribution). SKF and FAG majorly import industrial
bearings from their parents. This is in the form of traded bearings, with SKF earning 43%
revenue and FAG 32% from this segment. Massive capital outlay is expected to drive
increasing localization, in turn propelling huge structural opportunity for the industry. This
will be predominantly led by declining lead times and immense cost benefits. We expect the
companies to pass on benefits of growing localisation, which could lead to market share
gains. Additionally, global auto majors making India a manufacturing hub offers
unprecedented growth opportunity.

Cyclical drivers: The automobile sector is a major driver for the bearings industry with
revenue contribution of ~48%. The uptrend in two-wheelers (2W) is eventually expected to
extend to passenger vehicles (PVs) and commercial vehicles (CVs) in the last leg. With
expected recovery in automobiles, SKF (derives ~58% OEM revenue from 2W segment) will
be a strong beneficiary. FAG will be a strong beneficiary of the uptick in PV and CV
segments, deriving ~44% and ~30% of its automotive OEM revenues from these segments,
respectively. The bearing companies have a diversified revenue mix with almost half (~52%)
coming from the industrial sector. With expected revival in IIP, the industrial bearings
segment is expected to post robust growth also led by improvement in key segments such
as railways, power and mining sectors.

Competitive advantage: SKF, FAG, Timken and NRB have carved a niche with dominant
positioning anchored by their strong product portfolios along with technology expertise. As
a result, these players have been able to partner with OEMs right from the product

(Click here for
video clip)

Bearings
2

development stage. In India, SKF commands a formidable ~45% market share in ball
bearings segment and FAG commands a strong ~45% market share in the roller bearings
segment. Strong global parentage provides huge expertise and global processes to these
companies which new companies find difficult to replicate. Thus, their dominant position in
niche areas provides them high growth opportunity in their respective segments.

Comparison: SKF is the market leader with an overall ~28% revenue share driven by its
global parentage. FAG stands at No.2 with an overall revenue share of 17%. SKF has a
diversified business model (~45% of revenue from automotive segment, 49% from industrial
segment, 6% from exports). Also, overall SKF derives 47% revenue from the aftermarket,
which makes its revenue profile less cyclical. FAG derives 35% revenue from the automotive
segment, 51% from industrial segment and 14% from exports. Overall, it derives 30%
revenue from aftermarket.

Strong financial metrics: The industry has strong financial metrics: (1) high return ratios
(average core RoCE of ~40%, core RoE of ~28%); and (2) strong cash rich companies with net
cash per shareSKF and FAG at INR105/share (17% of market cap) as on CY12 and
INR195/share (12% of market cap) as on CY13, respectively. With robust cash flow
generation, we expect cash per share to be augmented by 1.88x over CY12-15E to
INR197/share in CY15E (31% of current market cap) for SKF and by 1.7x over CY13-15E to
INR339/share in CY15E (22% of current market cap) for FAG.

Strong investment case with long-term horizon: SKF and FAG will be strong beneficiaries of
the uptick in the 2W and 4W segments. This, in conjunction with a strong industrial
portfolio, will derive huge benefits of growing localisation. SKF and FAG are trading at 12.0x
and 12.3x CY15E EPS respectively, which is at a discount of up to ~15-19% to SKFs mean
historical valuations of 15x. We initiate coverage with BUY recommendations on SKF and
FAG valuing at 15x and 16x CY15E earnings, to arrive at the target prices of INR795 and
INR2,022, implying upside of 26% and 30%, respectively.

Bearings
Contents

Executive summary .................................................................................................................. 1
Contents ................................................................................................................................... 3
At a glance ................................................................................................................................ 4
India bearing industry: Overview ............................................................................................. 5
Evolution of domestic bearings industry.................................................................................. 8
Industry revenues and market share of players ...................................................................... 9
Industry drivers ...................................................................................................................... 14
Steady long-term financials.................................................................................................... 18
Global bearings industry ........................................................................................................ 26

Companies (Initiating Coverage)
FAG Bearings .......................................................................................................................... 29
SKF India ................................................................................................................................. 53

Companies (Unrated)
NRB Bearings .......................................................................................................................... 77
Timken India .......................................................................................................................... 81

Bearings
4


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Bearings
Indian bearing industry: Overview

The Indian bearings market accounts for less than 4% of the worlds bearing market. Major
organised players include international manufacturers like SKF, FAG and Timken, along with
several local manufacturers such as NEI, NRB, ABC and TATA.

Fig. 1: Domestic industry size (By Source) INR85bn <4% of world bearings market

Source: Industry, Edelweiss research

The unorganised segment largely meets requirements of the replacement market. While
part of 38% imports comes through official channels primarily for industrial applications,
theres substantial volume of spurious imports, especially in deep groove ball bearings.
Counterfeit bearing products account for ~20-30% of bearings sold in the replacement
market.

Chart 1: Type of demand - OEMs a major demand driver


Nearly 65% of the demand is derived from OEMs (INR55bn) and balance from aftermarket
(INR30bn). This comprises both auto as well as industrial sales. Auto and industrial bearings
contribute equally to sales.

Indian bearings industry
(INR85bn)
Organised (46%)
(INR39bn)
Unorganised (16%)
(INR14bn)
Imports (38%)
(INR32bn)
OEM
65%
After market
35%
India accounts for less than 4% of
the world bearing market; there
exists substantial scope over
longer term, led by localisation of
imports
Industry equally distributed
between automotive and
industrial bearings with OEMs
being a major driver

Bearings
6

Chart 2: User segments


Around 48% of industry sales are to the automobile sector. Bearing companies also have a
diversified profile with substantial industrial business, which is majorly imported. Companies
distribute bearings across a variety of industrial applications27% of industrial sales are to
general engineering, 20% to heavy industries and balance to electrical equipment and
others.

Chart 3: Type of bearings: Revenue equally divided between ball and roller bearings

Source: Source: Industry, Edelweiss research

The bearings industry is majorly divided between ball bearings (48% of demand) and roller
bearings segments (52% of demand). Within roller bearings, tapered constitute half and
balance is catered by spherical, cylindrical and needle bearings.

Automotive
48% Industry
52%
Ball
bearings
48%
Roller
bearings
52%
Tapered
42%
Cylindrical
29%
Spherical
17%
Needle
9%
Thrust
3%
Automobile
48%
General
Engineering
27%
Heavy Ind.
(incl
Railways)
20%
Electrical
equip. &
others
5%

Bearings
Table 1: Competitive landscape

Source: Source: Industry, Edelweiss research

Low competitive intensity: While there is no technology barrier per se, there is a level of
technology-based differentiation achieved by players like SKF and FAG making them
preferred suppliers to OEMs. SKFs and FAGs century-long experience in bearing
manufacturing gives them the ability to engage with OEMs from product development stage
and add much more value than a commoditised component supplier. The top-three are
dominant players in different types of bearings and do not compete head on or on pricing.

Low customer concentration: No single customer constitutes more than 10% of SKFs, FAGs
or NRBs revenues.

Industrials catered by imports: Companies have a diversified mix with bearings for
industrial applications catered to by imports from parent.

Variable cost structure: SKF, FAG and Timken procure their raw materials semi-finished for
traded goods, in turn saving in capital investment and cushioning cyclical downturns. This
will change with increasing manufacturing from FAGs stable.

Type of bearings
Deep grove
ball bearing
Spherical Roller
bearings
Cylindrical roller
bearings
Needle roller
bearings
Tapered roller
bearings
Thrust roller
bearings
Industry si ze (INR 95 bn) 46 8 14 4 21 1
Appl i cati on Wi de use i n two-
wheel ers,
four-wheel ers,
three-wheel ers
(Used i n wheel , axl es)
Car suspensi on,
dri ve shaft,
heavy machi nery
Machi ne tool s,
transmi ssi on,wheel -
set beari ngs for
rai l way
appl i cati ons
Ni che appl i cati on i n
engi ne, gearbox.
Wi th l ess l oad and
thrust.
Wi de appl i cati on
i n commerci al
vehi cl es
Transmi ssi on,
Al ternators,
axl es, Wheel s,
Compressors, Pumps,
Gearboxes, Fans,
El ectri cal goods
Suspensi on,
Gear boxes
Casters
Heavy stati onary
Industri al
conveyor
systems
Industri al fans
Cement & Coal
pul veri ze
Pumps Compressor
Gear boxes
Centri fuges
Mi ni ng Equi pments
Transmissi on
Transmi ssi ons
Transfer cases
Engi ne and val ve
trai ns
Steeri ng and braki ng
systems
Axl e supports
Outbound engi nes
Power tool copi ers
Vehi cl e front
wheel s
Di fferenti al and
pi ni on
confi gurati on
Conveyor rol l s
Machine tool
spi ndles
Trai l er Wheel s
Cl assi fi ers
Extruders
Oi l wel l swi vel s
Pumps
Pul p refi ners
Machi ne tool s
Market share SKF - 45% FAG - 45% FAG - 45% NRB - 70% Ti mken - (40-45%)
Other pl ayers FAG
Nati onal
Engi neers
Ti mken
SKF
Nati onal
Engi neeri ng
Nati onal
Engi neeri ng
SKF
NRB
INA Beari ngs
SKF
SKF
FAG
Nati onal Engi neers
ABC Beari ngs
SKF
FAG
Ti mken

Bearings
8

Evolution of domestic bearings industry

Chart 4: Revenue growth healthy through cycles

Source: Industry, Company, Edelweiss research

Table 2: Domestic manufacturing outpacing industry

Source: Company, Edelweiss research

Import substitution and plateauing unorganised market
Increasing preference for quality products has resulted in the unorganised replacement
market shrinking in size over the years. The trend during CY09-12 highlights that the
organised market posted 18% CAGR versus the unorganised markets -17%. Increasing
preference for longevity of product life cycle, lower maintenance and better R&D efforts to
develop new products have led to growth of organised players. Bearings are majorly
imported for the range of products currently being manufactured in India. Going ahead
though, imports will steadily fall as new production facilities are commissioned by organised
players in India. Hence, we expect the organised players to post strong market share gains,
particularly as they pass on the cost benefits when they start manufacturing.

0
14,000
28,000
42,000
56,000
70,000
F
Y

1
9
9
9
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Y

2
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1
3
(
I
N
R

m
n
)
SKF FAG NRB Timken NEI ABC
8% CAGR
20% CAGR
13% CAGR
Growth% CY09 CY10 CY11 CY12 CAGR (CY09-12)
Overal l Beari ngs 5.3 33.3 6.3 - 12.3
Imports 15.5 33.3 6.3 (0.7) 12.1
Organi sed 4.0 42.3 16.2 - 18.3
Unorgani sed (18.9) - (46.4) 6.7 (17.0)
Healthy revenue growth through
the cycles barring last two years

Bearings
Industry revenues (CY12/FY13) and revenue market share of players

Chart 5: The top-5 players in organised bearing market account 79% of revenues

Source: Industry, Company, Edelweiss research
Note: Numbers of NEI, a CK Birla group company, are as of FY12.

Revenue contribution of top bearings company wise
SKF is a strong player in the ball bearings segment, whereas FAG is leader in roller bearings
and NRB leads in the more compact needle roller bearing segment. Break up for Timken
India is not available, though it is known that it is a major player in tapered roller bearings.

Chart 6: SKF IndiaMajor revenue contributors


0
5,000
10,000
15,000
20,000
25,000
S
K
F

I
n
d
i
a
F
A
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e
a
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i
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s
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e
a
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C

B
e
a
r
i
n
g
s
(
I
N
R

m
n
)
Deep grove ball
bearings
35%
Tapered roller
bearings
18%
Othes
47%
Each player specialising in a
particular area ensures low
competitive intensity
SKF - A strong player in ball
bearings
SKF India
30%
FAG
Bearings
17%
NEI ltd
13%
NRB
Bearings
7%
Timken
India
8%
ABC
Bearings
2%

Bearings
10

Chart 7: FAG BearingsMajor revenue contributors


Chart 8: NRB BearingsMajor revenue contributors


Both FAG and SKF will be beneficiaries of the uptick in automotive and industrial segments
in India with substantial contribution from the above-mentioned segments. SKF on account
of having better distribution network will be a stronger beneficiary of replacement growth
in the industrial segment, as higher proportion of sales is from industrial replacements. NRB,
being a pure auto play, will majorly benefit from the cyclical upturn in the auto OEM
segment. NRB and FAG stand to gain from strong exports due to upsurge in the industry.

Cylindrical roller
bearings
35%
Spherical roller
bearings
25%
Othes
40%
Needle roller
bearings
58%
Cylindrical roller
bearings
16%
Othes
26%
FAG - A strong player in roller
bearings
NRB - A strong player in niche
needle roller bearings

Bearings
Revenue mix

Fig.2: SKF India


Fig. 3: FAG Bearings

Fig. 4: NRB Bearings

Note: NRBs industrial division has been demerged into a different company (NBIL) since October
2012. However, NBIL contributed a mere 6% to NRBs revenue at INR347mn.

Revenue
(C 12- INR22bn) Y
Auto - 45% Industries - 49% Exports - 6%
OEM - 70% Replacement - 30% OEM - 33% Replacement - 67%
Revenue
(C 12- INR14bn) Y
Auto - 35% Industries - 51% Exports - 14%
OEM - 66% Replacement - 33% OEM - 65% Replacement - 35%
Revenue
(F 13- INR5.9bn) Y
Auto - 80% Exports - 22%
OEM - 82% Replacement - 18%

Bearings
12

Stable aftermarket (INR30bn segment)
Bearings have a service life of more than four years, post which they come up for
replacement. Nearly 35% of the industry contribution is from aftermarket making it an
INR30bn segment in terms of size. Bearing companies replacement market exposure helps
them mitigate the cyclicality risk of OEM downturns and provides a favourable pricing
environment.

Chart 9: Aftermarket segment a major contributor
SKF revenue mix: ~40% from aftermarket FAG revenue mix: ~30% from aftermarket


SKF and FAG derive ~47% and ~30% of their revenues from the aftermarket segment,
respectively. We expect the automotive aftermarket segment to remain stable. Going ahead,
both SKF and FAG are set clock 20% plus CAGR over CY13-15, led by the replacement cycle.

Distribution network
SKF has ~20,000 retailers and ~300 distributers across the automotive and industrial market.
FAG has 200 distributors whereas Timken has 87 distributors.

Competitive edge
Competitive intensity among organised players is low given that each player is dominant in
one of the product segments. SKF, FAG, Timken and NRB have etched strong position in
industry owing to strong product portfolio in their respective segments along with
technology prowess. As a result, these players have been able to partner with the OEMs
right from the product development stage. Going forward we expect the current positioning
to remain the same based on the following factors:
Increased investments by each continue to protect their turfs.
Also, strong parentage provides the technological edge in their respective segments.
Continual innovation will lead to market share gains. New products contribute 10% plus
of revenues for these players.
Thus, their dominant position in the niche areas has reduced the competitive pressures and
provided sustained growth opportunity for each player.

OEM
47%
Replaceme
nt
47%
Exports
6%
35% of overall revenues from
aftermarket reduces cyclicality

OEM
56%
Replaceme
nt
30%
Exports
14%

Bearings
Table 3: Competitive advantage


Table 4: Technology collaboration of bearing players


Critical success factor for scoring SKF FAG
Di stri buti on reach (nos.) Hi gh (300) Moderate (200)
OEM reach Moderate (47%) Hi gh (56%)
Repl acement share (% of overal l sal es) Hi gh (47%) Moderate (30%)
Auto (% of overal l sal es) Hi gh (45%) Moderate (35%)
Industri al (% of overal l sal es) Hi gh (49%) Hi gh (41%)
Traded sal es (% of overal l sal es) Hi gh (43%) Moderate (32%)
Exports (% of overal l sal es) Low (6%) Moderate (14%)
Imports (% of overal l sal es) Hi gh (26%) Moderate (21%)
SKF Indi a SKF AB
FAG beari ngs Schaeffl er Technol ogi es AG
Ti mken Indi a The Ti mken Company
NEI Ltd NTN Japan
NRB Beari ngs NADELLA GmbH
ABC Beari ngs NSK Japan

Bearings
14

Industry drivers

Automotive bearing drivers
Automobile sector is a major driver for the domestic bearings industry with a high ~48%
contribution.

Chart 10: Correlation between bearing and automotive industry revenues

There is a strong correlation between the automobile and bearings industry growth.

Chart 11: 2W industry uptick SKF a major beneficiary with 58% of auto OEM sales


The 2W industry is estimated to register 9% volume CAGR over FY14-16, led by better rural
demand, good monsoons and pipeline of product launches by major OEM players like Bajaj
Auto and Honda Motorcycle and Scooter India. Additionally, more than 15 product launches
are expected across OEMs over the next 12-18 months. We expect SKF, which is a market
leader in 2W bearings (derives ~58% of auto bearings revenues) to be a strong beneficiary of
the burgeoning 2W segment.

(10.0)
0.0
10.0
20.0
30.0
40.0
F
Y
0
0
F
Y
0
1
F
Y
0
2
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
(
%
)
Bearing industry growth (%) Auto growth
(18.8)
(9.4)
0.0
9.4
18.8
28.2
0
4
8
12
16
20
F
Y
0
2
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
(
%
)
(
m
n
)
2W % YoY
With ~58% of its OEM revenues
from 2W sales, SKF will be a
major beneficiary led by 10%
growth expected for industry in
FY16E

Strong correlation between
automotive and bearing industry
revenues with ~48% contribution

Bearings
Chart 12: PV to bottom out soon FAG, major beneficiary with 44% of auto OEM sales


PVs may witness back-ended growth in FY15, aided by robust growth in petrol vehicles,
improving rural demand and new product launches. Petrol vehicle sales are set to improve
due to the reducing gap between petrol and diesel prices. Over the next 18 months, ~16-17
new product launches are expected across the OEMs. We estimate PVs to register 9%
volume CAGR over FY14-16E, though more back ended with 12% growth expected in FY16E.

Chart 13: MHCV strong rebound in FY16E FAG, to benefit with ~30% auto OEM sales


Post the uptick in 2W and PV segment, going by the historic trend the last leg of demand
uptick is expected in the CV industry. The CV industry is expected to uptick in 2HCY14 and
grow by 11% in FY15 and 23% in FY16 post a 19-20% dip in FY14E.

Despite the current lackluster environment, the OEMs are incurring large capex towards
R&D and product development.

(8.0)
0.0
8.0
16.0
24.0
32.0
0.0
0.7
1.4
2.1
2.8
3.5
F
Y
0
2
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
(
%
)
(
m
n
)
PVs % YoY
(40.0)
(20.0)
0.0
20.0
40.0
60.0
0
80
160
240
320
400
F
Y
0
2
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
(
%
)
(
m
n
)
MHCVs % YoY
With ~44% of its OEM revenues
from PV sales, FAG will be a
major beneficiary led by 12%
growth expected in PV volumes
in FY16E

Bearings
16

Table 5: Capex plans of automobile companies


We expect FAG to be a major beneficiary with uptick in 4W OEM industry and SKF a major
beneficiary led by uptick in 2W OEM industry growth over next 2-3 years.

Overall, post a sluggish CY13 we expect the auto bearings segment of the companies to post
12% growth in CY14 and 19% in CY15 in the OEM segment.

Industrial bearing drivers
Bearing companies have a diversified revenue mix with half the revenues (~52%) coming
from the manufacturing sector (excluding automobiles).

Chart 14: Correlation between bearings and IIP, CGFC and core manufacturing growth


As can be seen there is a strong correlation between IIP, manufacturing GDP growth, gross
capital formation in the country and bearings industry growth.

Infrastructure expansion coupled with industrial growth will have a favourable impact on
the Indian bearings market.

Railways
The Indian Railways has earmarked an investment of INR5192bn (FY13-17) in the 12
th
five
year plan. This is as compared to INR2012bn in the 11
th
five year plan. This should positively
impact the bearings industry. In railways sector bearings are used in wheel axles, drive units,
traction motors, etc.

Capex (INR mn) FY12 FY13 FY14E FY15E
Ashok Leyl and 6,753 7,659 2,500 2,500
Mahi ndra & Mahi ndra 14,195 12,362 11,000 11,000
Maruti 21,798 23,968 25,000 24,000
Tata Motors 30,802 29,000 25,000 25,000
Hero Motors 6,835 4,001 8,000 8,000
Bajaj Auto 3,000 3,000 3,000 3,000
(10.0)
0.0
10.0
20.0
30.0
40.0
F
Y
0
0
F
Y
0
1
F
Y
0
2
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
(
%
)
Bearing industry growth (%) IIP
Demand to revive with improving
macros

Strong correlation between
industrial uptick and bearing
industry revenues with ~52%
contribution

Bearings
Power
The Twelfth five-year plan targets an investment of INR15,017bn which envisages an
incremental capacity of 88,537MW. This is as compared to the 53,922MW addition in the
11
th
plan which had an investment outlay of INR7,285bn. Investment in the renewal energy
segment is projected at a strong INR3,186bn as compared to INR892bn in the previous plan.
In power sector bearings are used in Pulverizers, bowl mills, pumps and material handling.

Mining
The mining industry may witness resurgence with 25-30 mines in Karnataka re-commencing
operations over the next one year. These mines have already secured their Reclamation and
Rehabilitation Plan and are awaiting other statutory approvals. Usage of bearings in Mines:
Shovels, draglines, haul trucks, loaders, crushing, screening and material handling.

While there could be some delays in fresh investments (as measured by GFCF),
manufacturing growth could recover post more clarity in the government policies after the
general elections. With uptick in GDP and IIP from 2HCY14, we expect the industrial bearings
segment to record 16% growth in CY14 and 25% growth in CY15 post de-growth of ~10% in
CY13.

Customs duty savings
As can be seen manufacturing of ball or roller bearings in India helps in 2.5% cost savings. As
a result with increasing localization by players we expect companies to have cost savings.

Table 6: Customs duty structure

Source: Industry

Ball/roller bearings (%) Pig iron (%)
Customs Basi c Duty 7.5 Customs Basi c Duty 5.0
Addl Duty CVD 12.0 Addl Duty CVD 12.0
Spl Addl Duty(Spl .CVD) 4.0 Spl Addl Duty(Spl .CVD) 4.0
Exci se Cess 0.0 Exci se Cess 0.0
Customs Cess 3.0 Customs Cess 3.0

Bearings
18

Steady long-term financials

Revenue growth: SKF and FAG on secular uptrend
SKFs revenues posted healthy double-digits with 19% CAGR over the longer tenure (ten-
year term - CY02-12) in line with FAGs 19% CAGR. However, FAG has overtaken SKF in the
last five years, led by strong market share penetration. Going forward, with cyclical uptick in
industry, we expect growth to accelerate for both players.

Table 7: Sales CAGR over the years


Table 8: EBITDA CAGR over the years


Table 9: PAT CAGR over the years


Bearings industry has grown profitably over long term cycles. As can be seen, SKF and FAG
have registered 18% plus CAGR over ten years in sales and PAT as well as in past three years.

CY12
(INR mn)
1 year
growth (%)
3 year
CAGR (%)
5 year
CAGR (%)
8 year
CAGR (%)
10 year
CAGR (%)
SKF Indi a 22,276 (8.5) 12.0 7.0 18.0 19.0
FAG Beari ngs 14,467 10.6 22.0 18.0 21.0 19.0
Ti mken Indi a 6,885 (17.0) 30.0 15.0 12.0 16.0
NRB Beari ngs 5,916 6.0 19.0 12.0 13.0 14.0
CY12/FY13
(INR mn)
1 year
growth (%)
3 year
CAGR (%)
5 year
CAGR (%)
8 year
CAGR (%)
10 year
CAGR (%)
SKF Indi a 2,584 (13.0) 13.6 - 14.0 16.0
FAG Beari ngs 2,209 (13.0) 29.0 11.0 20.0 17.0
Ti mken Indi a 733 (31.0) 21.2 5.2 3.8 13.0
NRB Beari ngs 1,008 (12.0) 21.3 7.1 9.1 11.8
CY12/FY13
(INR mn)
1 year
growth (%)
3 year
CAGR (%)
5 year
CAGR (%)
8 year
CAGR (%)
10 year
CAGR (%)
SKF Indi a 1,900.8 (8.8) 22.0 3.0 16.0 25.0
FAG Beari ngs 1,591.8 (9.5) 29.0 15.0 23.0 23.0
Ti mken Indi a 442.4 (45.0) 11.0 3.0 4.0 14.0
NRB Beari ngs 480.4 (5.6) 30.0 7.0 7.0 14.0
FAG has consistently
outperformed peers across time
periods

Bearings
Gross margins/ EBITDA margins

Chart 15: Gross margins Chart 16: EBITDA margins


SKFs and FAGs overall gross margins at 35-37%. This is despite higher contribution of
traded goods to overall sales. On manufactured basis, both generate ~50% gross margins.
SKF has traded goods contribution of 43%, FAG 32% and Timken 25% of overall gross sales.
NRB and NEI have majority manufactured goods. Also, FAG has averaged ~17% EBITDA
margin and SKF at ~12% in last 5 years despite having trading sales led by its product profile
and operational efficiency.

Return ratios
RoE of FAG and SKF looks suppressed owing to huge cash in balance sheet. Core average
RoE of FAG and SKF at 28-29% is higher than NRBs RoE of 18%.

Chart 17: RoE profile of bearings players


25.0
32.0
39.0
46.0
53.0
60.0
CY08 CY09 CY10 CY11 CY12
(
%
)
SKF India FAG Bearings
Timken India NRB Bearings
11.0
16.6
22.2
27.8
33.4
39.0
CY10 CY11 CY12
(
%
)
SKF India FAG Bearings NRB Bearings Timken India
Average gross margins of FAG
and SKF at ~36% despite having
high traded sales

Average core RoE of FAG and SKF
at ~29-31%

7.0
11.8
16.6
21.4
26.2
31.0
CY06 CY07 CY08 CY09 CY10 CY11 CY12
(
%
)
SKF India FAG Bearings
Timken India NRB Bearings

Bearings
20

Table 10: SKF cash flow


Strong growth in operating cash flow and reduction in quantum of capex to lead to
improvement in free cash flow yield from CY14E.

Table 11: FAG cash flow


Higher growth along with better working capital management is expected to result in higher
operating cash flow and strong free cash yield over the next two years.

Table 12: NRB cash flow


Better working capital management will primarily drive NRBs operating cash flow in turn
leading to higher yield. While the company is financially leveraged, improvement in
operating cash flows will result in free cash flow.

Table 13: Timken cash flow


(mn) CY10 CY11 CY12 CY13E CY14E CY15E
Operati ng cash fl ow 1,159 1,509 1,989 1,543 2,336 2,881
Capex (922) (817) (807) (600) (500) (500)
Free cash fl ow 238 693 1,182 943 1,836 2,381
OCF yi el d (%) 3.5 4.5 5.9 4.6 7.0 8.6
FCF yi el d (%) 0.7 2.1 3.5 2.8 5.5 7.1
(mn) CY10 CY11 CY12 CY13E CY14E CY15E
Operati ng cash fl ow 1,320 826 1,371 2,050 3,023 3,454
Capex (194) (1,471) (1,407) (640) (1,100) (900)
Free cash fl ow 1,126 (645) (37) 1,410 1,923 2,554
OCF yi el d (%) 5.1 3.2 5.3 7.9 11.7 13.3
FCF yi el d (%) 4.3 (2.5) (0.1) 5.4 7.4 9.9
(mn) FY10 FY11 FY12 FY13
Operati ng Cash Fl ow 759 406 546 344
Capex (116) (358) (1,134) (936)
Free Cash Fl ow 643 48 (588) (592)
OCF yi el d (%) 43.5 11.6 15.6 9.9
FCF yi el d (%) 36.9 1.4 (16.9) (17.0)
(mn) CY10 CY11 FY12 FY13
Operati ng Cash Fl ow 584 384 341 131
Capex (81) (37) (443) (302)
Free Cash Fl ow 503 347 (102) (170)
OCF yi el d (%) 5.3 3.5 3.1 1.2
FCF yi el d (%) 4.6 3.1 (0.9) (1.5)

Bearings
Working capital
SKF followed by FAG is best in terms of net cash conversion cycle at an average of 42 and 49
days, respectively. NRB has high credit period due to higher auto OEM sales vis--vis SKF and
FAG. This is also due to NRB being a pure auto player. Industrial bearings are typically cash
and carry on account of being sold through a distribution network.

Chart 18: Average receivable days


Chart 19: Average inventory days


20
40
60
80
100
120
(
N
o

o
f

d
a
y
s
)
CY10 CY11 CY12
20
65
110
155
200
245
(
N
o

o
f

d
a
y
s
)
CY10 CY11 CY12
SKF and FAG have demonstrated
strong working capital
management with average cash
conversion cycle at ~42-49 days
With a variable cost structure,
both SKF and FAG have lower
working capital cycle

Bearings
22

Chart 20: Average payable days


Chart 21: Net cash conversion days


Asset turn
High FAT ratio and variable cost resulting in superior returns
On lower asset base, SKF, FAG and Timken have higher fixed asset turnover ratio (average of
2.4x). In fact, even the average core fixed asset turnover ratio (excluding traded revenues)
for FAG and SKF at an average 1.6x is higher than NRB at 1.1x. As a result, SKF and FAG have
strong return ratios (28% plus core RoEs and core RoCE of over 40%). With higher variable
cost structure, both SKF and FAG have lower working capital cycle of an average 42-49 days
as compared to ~190 days for NRB.

20
44
68
92
116
140
(
N
o

o
f

d
a
y
s
)
CY10 CY11 CY12
20
60
100
140
180
220
(
N
o

o
f

d
a
y
s
)
CY10 CY11 CY12
Also, industrial sales contribution
which is cash and carry, leads to
better credit period
With lower asset base, SKF and
FAG have higher fixed asset
turnover ratio; even core fixed
asset turnover ratio (excluding
traded revenues) is higher than
NRB

Bearings
Chart 22: Strong core fixed asset turn for FAG, SKF, Timken


Capex
Capacity expansion is currently on-stream, with the companies preparing for next leg of
demand upswing.

Chart 23: Capital outlay


SKF incurred significant capex of INR2.5bn in the past three years at an average run-rate of
INR850mn per year, which is expected to taper off to INR1.6bn over CY13-15 or at an
average run-rate of INR500-600mn per year. Currently, the company has capacity utilisation
of ~65%, which it intends to increase going ahead.

FAG invested INR3.5bn in the past two years and proposes to further invest INR3.3bn over
the next few years. We have assumed INR2bn over next few years. We expect the company
to log strong growth on massive capacity expansion and on basis of operating at full capacity
in CY11.
0.0 0.5 1.0 1.5 2.0 2.5
CY10
CY11
CY12
(x)
Timken India NRB Bearings FAG Bearings SKF India
0
320
640
960
1,280
1,600
CY10 CY11 CY12 CY13E CY14E CY15E
(
I
N
R

m
n
)
SKF FAG
Strong growth on massive
expansion and utilisation; SKF
incurred INR2.5bn over CY10-12;
we have assumed further
INR1.6bn over CY13-15E; FAG
incurred INR3.5bn over CY11-13;
we have assumed further INR2bn
over CY14-15E

Bearings
24

Exports
Exports contribution to revenues of the different companies is as follows: 6% of SKF, 14% of
FAG, 22% of NRB and 26% of Timkens revenues, as on CY12/FY13. The parent companies
source goods from their Indian subsidiaries (SKF India, FAG and Timken) to avail advantages
of low-cost operations. Exports have grown the fastest for NRB at 28% CAGR over CY07-12.
Over the mentioned period, SKFs registered exports at -2% CAGR, FAG at 18% CAGR and
Timken at 10% CAGR.

Chart 24: Export sales Chart 25: Exports as a % of sales


Imports
SKF, FAG and Timken import a sizeable portion of raw materials and finished goods. The
three Indian players primarily import industrial bearings from their parent company, which
complements their domestic production. Imports contribute 33-35% of both SKFs and
FAGs revenues, and 21% of Timkens revenues. As a result, their business model is asset
light and the cost structure is substantially variable, which helps during a downturn.

While SKF India manufactures industrial bearings on a small scale (6-7% of its industrial
sales), in CY10, subsidiary SKF Technologies started domestic manufacturing, for which SKF
will be a distributor. We believe increasing local manufacturing will help reduce the lead
time and costs. FAG manufactures industrial bearings to the extent of 18-19% of industrial
sales and started production of large size bearings at its Savli plant towards CY12 end. With
manufacturing operations in industrial segment expanding for both FAG and SKF (through
SKF Technologies) we expect imports to gradually decline over time.

216
679
1,143
1,606
2,070
2,533
CY07 CY08 CY09 CY10 CY11 CY12
(
I
N
R

m
n
)
SKF FAG NRB Timken
Exports a major contributor for
Timken and NRB at 26% and 22%
of revenues respectively; 14% of
FAGs sales and 6% of SKFs sales

0.0
10.0
20.0
30.0
40.0
50.0
(
%
)
SKF FAG NRB Timken

Bearings
Chart 26: Imports


Chart 27: Imports as a % of sales


0
2,000
4,000
6,000
8,000
10,000
(
I
N
R

m
n
)
SKF FAG NRB Timken
0.0
10.0
20.0
30.0
40.0
50.0
(
%
)
SKF FAG NRB Timken
Increasing localisation to result in
declining imports over time

Bearings
26

Global bearings industry: USD51bn in size

The global bearings market is estimated at over USD51bn in 2012, growing at 1-2% in local
currency. Asia is the largest bearings region with almost 50% of the total, having grown from
less than 30% ten years ago. Europe and Americas now account for less than 25% of the
world market. Chinas share of the worlds bearing market was slightly down to ~25%.
Japans share of the world bearing market has increased slightly, but the domestic Japanese
bearings demand still accounts for less than 15% of the world total. Other Asian markets
with sizeable bearing production and growth in recent years include India, Thailand,
Indonesia, Malaysia and the Republic of Korea. As per a market research report, the global
automotive bearings market is expected to post CAGR of 7.42% over 2014-18.

SKF is the global market leader in ball bearings with an estimated market share of ~20%,
followed by the Schaeffler Groups brands INA/FAG at ~18%, Timken (US) at ~12% and the
Japanese NSK and NTN at ~10% and ~7%, respectively. The top 3 Chinese producers hold 3%
of the global market, despite being in the largest region in terms of demand, which
highlights fragmentation levels of the Chinese bearings market.

The Asian bearings industry has
grown from 30% ten years ago to
~50% now; Europe and America
now account for less than 25% of
the world market

Bearings
Definitions

Bearing is a machine element used to support load and reduce friction in moving parts. The
bearings industry is classified into: a) bimetal bearings; and b) antifriction bearings (includes
ball bearings and roller bearings). The rolling element acts as a differentiator in a bearing.
Roller bearings are named after the rollers shape, such as cylindrical roller bearings, needle
roller bearings, tapered roller bearings, spherical roller bearings and thrust roller bearings.
The choice of bearing primarily depends on revolutions per minute (RPM) and load.

Deep groove ball bearings are versatile, self-retaining bearings with solid outer rings, inner
rings and ball and cage assemblies. These products are of simple design, durable in
operation and easy to maintain; they are available in single and double row designs and in
open and sealed variants. These are generally less customised and available off the shelf.
Due to their low frictional torque, they are suitable for high speed RPM and medium load
requirements.

Cylindrical roller bearings are very rigid, can support high radial loads, and due to the cage,
are suitable for higher speeds than the full complement designs. Bearings with suffix E have
a larger roller set and are thus designed for extremely high load carrying capacity. The
bearings can be taken apart and can therefore be fitted and dismantled more easily. Both
bearing rings can therefore have an interference fit.

Spherical roller bearings are double row, self-retaining units comprising solid outer rings
with a concave raceway, solid inner rings and barrel rollers with cages.

Needle roller bearings come with cylindrical rollers that are small in diameter. Needle roller
bearings are used in medium RPM, high-load requirements compared to ball bearings,
which are used in high RPM, medium-load requirements.

Tapered roller bearings comprise solid inner and outer rings with tapered raceways and
tapered rollers with cages. The bearings are not self-retaining. As a result, the inner ring
together with the rollers and cage can be fitted separately from the outer ring. Tapered
roller bearings can support axial loads from one direction as well as high radial loads.

Bearings
28


THIS PAGE IS INTENTIONALLY LEFT BLANK

Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.


FAG Bearings (FAG) is Indias second largest bearing company, with an
overall and roller bearings market share of ~17% and 45%, respectively.
In the past five years, the company has outpaced industry with 18% sales
CAGR, 15% operating margin, average core RoCE of 48% and 23% RoE.
High exposure to passenger vehicles (~45% of auto OEM sales) will drive
FAGs revenues. Considering significant ramp up in manufacturing
capacity (2.1x in gross block over CY10-15), the company is well placed to
capitalise on structural opportunity of India becoming one of the major
manufacturing hubs of global OEMs as well as localisation of industrial
sales. Parents (Schaeffler Group) sharpening focus on India and higher
localisation will be catalysts of strong sales growth and margin
expansion. Hence, we initiate coverage with BUY.

Huge capital outlay to drive growth and margin
With gross block expected to catapult 2.1x over CY10-15E, we have assumed 21% CAGR
in manufacturing sales over CY13-15. Also, FAG is localising industrial production of large
size bearings. With increasing capacity utilisation and gradual lowering of trading sales
(by 400bps over CY12-15E to 27.8% of sales), we expect gross and operating margins to
catapult 67bps and 203bps to 37.9% and 14.9%, respectively, over CY13-15E.

Mission India: Double share in parents turnover; exports hub
Indian operations currently contribute less than 4% to the group's annual turnover;
with expansion in portfolio and capacity (augmenting gross block by 2.1x over CY10-
15E) and the R&D set up, the parent aims to increase India contribution to ~8-10%.
This is in line with its strategy of not only tapping the growing domestic market, but
also using India as a significant hub for exports to the US, Europe and Asia.

Outlook and valuations: Robust bearing; initiate with BUY
We estimate FAGs earnings to surge 31% and 32% in CY14 and CY15, respectively,
post (-24%) in CY13. This growth will be led by robust rise in manufacturing sales post
capacity addition in auto as well as industrial division. The stock is trading at 16.3x and
12.3x CY14E and CY15E P/E, respectively, closer to mid band of its historical valuation.
We initiate coverage with BUY and target price of INR2,022, valuing the company at
16x CY15E earnings, implying 30% upside from current level.

INITIATING COVERAGE
FAG BEARINGS
Growth uninterrupted
EDELWEISS RATINGS
Absolute Rating BUY
Investment Characteristics Growth

MARKET DATA (R: FAGB.BO, B: FAG IN)
CMP : INR 1,600
Target Price : INR 2,022
52-week range (INR) : 1,679/1,100
Share in issue (mn) : 16.6
M cap (INR bn/USD mn) : 27 / 427
Avg. Daily Vol. BSE/NSE (000) : 5.2

SHARE HOLDING PATTERN (%)
Current Q1FY14 Q4FY13
Promoters *

51.3 51.3 51.3
MF's, FI's & BKs
18.6 16.6 16.6
FII's 15.0 15.9 16.0
Others 15.2 16.2 16.1
* Promoters pledged shares
(% of share in issue)
: NIL

PRICE PERFORMANCE (%)

Sensex Stock
Stock over
Sensex
1 month (2.8) (4.5) (1.7)
3 months (1.9) 13.7 15.6
12 months 4.9 182.5 177.5

Shradha Sheth
+91 22 6623 3308

Manoj Bahety, CFA
+91 22 6623 3362

India Equity Research| Bearings
February 19, 2014

(Click on image
to view video)
Financials
Year to December CY12 CY13 CY14E CY15E
Net revenues (INR mn) 14,467 14,300 16,764 20,343
EBITDA (INR mn) 2,204 1,836 2,319 3,024
Core profi t (INR mn) 1,592 1,218 1,591 2,100
Di l uted shares (mn) 17 17 17 17
EPS (INR) 95.8 73.3 95.8 126.3
P/E (x) 16.3 21.3 16.3 12.3
EV/EBITDA (x) 10.2 11.7 8.8 6.3
ROAE (%) 19.8 13.1 15.0 17.1

Bearings
30

Investment Rationale

Market leader in less competitive roller bearings
FAG is part of the Schaeffler Group, the second largest player in bearings and worlds
leading manufacturer of roller bearings and linear products. In India, the company
commands an overall market share of ~17% with leadership in the roller (spherical and
cylindrical) bearings segments with ~45% share. In the spherical roller bearing segment, it is
the market leader with around 56% share. The company also has substantial market shares
of around 35% and 19% in the cylindrical roller bearings and ball bearings segments,
respectively. Roller bearings face little less counterfeiting than deep groove ball bearings.
This enables FAG enjoy superior margin in roller bearings in the aftermarket compared to
other products.

Strong consistent performance outpacing industry historically
Historically, FAG has grown consistently and outpaced peers on growth and margin front,
owing to its extensive exposure to the high-growth PV industry. Over the past five years, the
company posted strong 18% CAGR in sales and 15% CAGR in PAT.

Table 1: Performance through the cycles

Source: Company
Note: For 3 years, 5 years, 8 years and 10 years we have taken CY12 base to make it comparable
since SKF has yet not declared results

Strong automotive relationships, high exposure to passenger vehicles
to drive growth
FAG derives 35% revenue from automotive segment, of which 66% is OEM. By virtue of the
companys high exposure to four-wheelers in the OEM segment (~44% and 30% in PVs and
CVs, respectively) we expect its auto (OEM) bearings segment revenue to post 15% CAGR.
Our optimism is underpinned by the pent up demand, improving rural demand riding a good
monsoon and new product launches (16-17 product offerings scheduled by OEMs over the
next 18 months).

Also, FAG globally derives 69% of its overall revenue from the automotive segment. Ergo,
the company is the preferred bearing systems supplier to worlds leading manufacturers of
cars and trucks like GM, Ford, Volkswagen, Volvo and Daimler Chrysler, to name a few.
Almost all these players are looking to enhance their presence in India. This gives FAG a
competitive edge over peers in the supply of bearings to these OEMs in India.

1 year 3 year 5 year 8 year 10 year
growth CAGR (%) CAGR (%) CAGR (%) CAGR (%)
Sal es 14,300 (1) 22 18 21 19
EBITDA 1,836 (17) 35 11 20 17
PAT 1,218 (23) 34 15 23 23
CY13 (INR mn)

Strong product positioning in
roller bearings with 45% market
share and overall 15% market
share

India, a strong focus area for
parent, with vision to take its
contribution to global turnover
to 8-10% from ~3% currently

FAG Bearings
31

Chart 1: Uptick in Passenger vehicles industry on pent up demand from FY15E


Table 2: New product launches over next 1-2 years


(8.0)
0.0
8.0
16.0
24.0
32.0
0.0
0.7
1.4
2.1
2.8
3.5
F
Y
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E
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1
6
E
(
%
)
(
m
n
)
PVs % YoY
Company Brand Segment Timeline Remarks
Nissan Datsun Go Compact Q1FY15 On Mi cra pl atform; Compete wi th Al to, Eon etc
Datsun Go Pl us MPV FY15 Compete wi th Erti ga
Datsun Go Sedan Sedan FY15 On Go pl atform
Mi cra Compact FY16 Refresh; based on modul ar CMF-A pl atform
Renault Lodgy MPV FY16 Compete wi th Erti ga/Innova
Hyundai Xcent Compact Sedan Q1FY15 Compete wi th Dzi re
GC Compact SUV FY16 i 20 Pl atform; Sub 4m
Honda Mobi l i o MPV Q3FY15 based on Bri o pl atform; Compete wi th Erti ga
new Jazz Premi um Compact Q3FY15 Known as Fi t i n Japan;
Honda Vezel Compact SUV FY16 mi ni CRV l ooki ng; Petrol /Di esel engi nes from Ci ty/Amaze
Maruti Cel eri o Compact Feb-14 Fi rst wi th AMT Technol ogy
Ci az Premi um Sedan FY15 end New SX4; Compete wi th Ci ty/Verna
SX4 S-Cross Crossover FY15 SX4 Crossover; Compete wi th XUV, Duster
Y9T LCV FY16 Fi rst LCV wi th 800cc di esel engi ne
YBA Compact SUV FY16 Sub 4m; Bui l t for Indi a; Ri val s Ecosport
Tata Motors Bol t Compact Q2FY15 Based on Vi sta pl atform; to repl ace Vi sta
Zest Sedan Q2FY15 Based on Manza pl atform; to repl ace Manza
Nexxon Compact SUV
M&M S-101 Compact SUV FY16 Sub 4m; Pri ce 4L; Monocoque constructi on
Ford Fi go sedan Compact Sedan FY15 Compete wi th Dzi re
New Fi esta Sedan FY15 Fi esta refresh
VW Tai gun Compact SUV FY17 Compete wi th Ecosport
Fiat Avventura Compact SUV H2FY15 Compete wi th Ecosport
GM Adra Compact SUV FY17
Toyota Eti os Cross Crossover Q1FY15
Expected uptick in its key OEM
segment 4W (PV+CV) accounts
for ~75% of its overall auto OEM
sales - we expect automotive sales
to log 19% CAGR over CY13-15E

Bearings
32

Table 3: Capex plans of players (INR m)


Huge capex for automotive, as well localisation of industrial bearings to
drive growth
Led by ~135% capacity utilisation in CY10 in the manufacturing segment, FAG undertook
huge capex of INR3.5bn in the past three years to gear for growth. As a result, the company
enhanced capacity towards advanced generation three-wheel bearing cell and
technologically superior X-life cylindrical and spherical roller bearing production at its
existing plant at Vadodara. Also, in October 2012, it commissioned a new plant at Savli (near
Vadodara) for manufacturing low friction ball bearings and large-size bearings. Savli plant
has a capacity of 36mn ball bearings units per year and 12,000 pieces per year of large scale
bearings. Currently, FAG primarily imports industrial bearings (traded) from the parent
company. It derives 51% revenue from industrial bearings, of which while ~32% is from
trading, 19% is out of manufacturing. In line with its long-term strategy to invest in
qualitative growth, FAG has started further localising industrial production of large-size
bearings.

We expect a significant benefit with increase in India-made industrial bearings post the
planned expansion as it will reduce lead time and cut costs by way of lower manufacturing
costs and substitution of advalorem import duties.

We anticipate the massive capacity expansion of INR3.5bn (85% expansion on CY10 gross
block) to significantly boost growth. Further, capex of INR2bn (28% expansion on CY13 gross
block) is estimated over CY14-15. As a result, overall gross block will catapult 2.1x over
CY10-15E. We have assumed incremental manufacturing sales of INR5.7bn over CY11-15E,
on this overall capex of INR5.5bn over CY11-15E, a fixed asset turn of 1x. The company has
historically generated average core fixed asset turn of 1.8x. We have assumed 21% CAGR in
manufacturing sales over CY13-15E versus 15% CAGR in past five years.

Capex FY12 FY13 FY14E FY15E
Ashok Leyl and 6,753 7,659 2,500 2,500
Mahi ndra & Mahi ndra 14,195 12,362 11,000 11,000
Maruti 21,798 23,968 25,000 24,000
Tata Motors 30,802 29,000 25,000 25,000
Capital outlay of INR3.5bn in past
three years; further capex of
INR3.3bn planned over next few
years; we have assumed INR 2bn
over next two years
Fag has generated fixed asset
turnover of 1.8X historically

Strong automotive relationships
with ~44% of OEM revenues
from passenger vehicles and
~30% from commercial vehicles

33

FAG Bearings
Chart 2: More than doubling of gross block over CY10-15E


The Savli plant is expected to reduce dependence on trading sales over time. Contribution of
trading sales is expected to dip from 31.8% in CY12 to 27.6% in CY15E and stimulate
profitability.

Chart 3: Increasing manufacturing sales trajectory


1.0
1.4
1.8
2.2
2.6
3.0
3,200
4,400
5,600
6,800
8,000
9,200
CY09 CY10 CY11 CY12 CY13 CY14E CY15E
(
X
)
(
I
N
R

m
n
)
Gross block Asset turn
(15.0)
(3.6)
7.8
19.2
30.6
42.0
1,330
2,510
3,690
4,870
6,050
7,230
CY07 CY08 CY09 CY10 CY11 CY12 CY13E CY14E CY15E
(
%
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(
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m
n
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Traded bearings % Growth % of sales
Significant capex outlay (gross
block doubling over CY10-15) is
in line with parents vision to
double Indias contribution
Third generation
wheel bearing
plant commissioned
at Vadodara in 2011
Strong capex and automotive and
industrial uptick to lead to 21%
CAGR in manufacturing sales over
CY13-15E

Miscellaneous
34

Chart 4: Trading sales to gradually moderate


Lower traded sales, higher capacity utilisation to boost margin
FAGs overall gross margin stood at ~37% in CY12. Its manufacturing margin stood at ~49%
and traded margin at ~15% in CY12. In the latter, the company fetches only distribution
margin, which suppresses overall margin. Traded goods, which contribute 32% to overall
sales, are mostly imported from parent group company (Schaeffler Tech. AG, Germany). The
company has generated an overall average EBITDA margin of 17% in the past five years.
With increasing capacity utilisation and lower traded sales (import substitution) we expect
improvement in gross margin and operating margin by 67bps and 203bps to 37.9% and
14.9%, respectively, over CY13-15E. Ergo, we expect 28% CAGR in operating profit over
CY13-15E.

Chart 5: Superior EBITDA margins, set to further improve


(15.0)
(3.6)
7.8
19.2
30.6
42.0
1,330
2,510
3,690
4,870
6,050
7,230
(
%
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(
I
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R

m
n
)
Traded bearings % Growth % of sales
10.0
13.0
16.0
19.0
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25.0
29.0
33.0
37.0
41.0
45.0
49.0
CY08 CY09 CY10 CY11 CY12 CY13 CY14E CY15E
(
%
)
(
%
)
Gross margin (%) EBITDA margin (%)
Increasing manufacturing
capacity to reduce trading sales
contribution by 400bps over
CY12-15E to 27.8%
Increasing manufacturing sales
and operating leverage to lead to
gross and operating margins
surging 67bps and 203bps over
CY13-15E to 37.9% and 14.9%,
respectively

35

FAG Bearings
Parent envisions higher contribution from India; make it exports hub
India to account for ~8-10% of global market turnover over next few years
Schaefflers India vision is to reach EUR1bn in sales in 2020, implying 15% plus CAGR over
the next eight years (from sales of ~EUR0.3bn in CY12 for the group).

India to be exports hub to US, Europe, Asia: The Indian operation currently contributes less
than 4% to the group's annual turnover. However, with the expanding portfolio, capacity
and the R&D set up, the companys share will more than double. India will contribute more
than 8-10% to the groups global turnover as the company intends to tap not only the
growing domestic market, but also use India as a significant hub for exports to the US,
Europe and Asia.

Strengthening R&D to retain innovation edge: Banking on a strong global R&D network, the
parent intends to considerably strengthen innovation capabilities in Asia Pacific, to cater to
the regions customers. India, which is the centre of R&D excellence for the group's
motorcycle and tractor business, is expected to play a larger R&D role in other areas of
automotive and engineering businesses going ahead. FAG will invest close to INR500mn on
R&D for the group, and will be doubling the number of engineers to 400 in the next couple
of years. Globally, the Groups target is to maintain pole position in patent applications by
innovating continuously and maintaining R&D expense at 5% of annual sales. In CY12,
Schaefflers R&D expenses surged 19.8 % to EUR593mn (CY11: EUR495mn) or 5.3% of
revenue (CY11: 4.6 %).

Augmenting investments: Schaefflers target is to further expand the local production
network. In the groups global scheme of things, Asia Pacific is one of the key regions where it
envisages robust growth and sales over the long term. Hence, the group has chalked out plans
to invest around EUR300mn in Asia, of which EUR154mn will be invested in India over the next
few years. We assume half of this capex has already been met. The Schaeffler Group opened
new plants in India, Thailand and China, consistently implementing its in the region, for the
region strategy. FAG currently operates 13 production sites (out of total 70) in the Asia Pacific
region and more than half of the production is planned in the high growth Asia region.

Table 4: Planned greenfield sites and plant extensions for 2012-2014: Customer
proximity In the region, for the region strategy

Particulars
Savli, India
Pune, India
Hosur, India
Irapuato, Mexico
Kysuce, Slovakia
Skalica, Slovakia
Szombathely, Hungary
Brasov, Romania
Nanjing, China
Yinchuan, China
Taicang 5, China
Taicang 6, China
Suzhou, China
BienHoa City, Vietnam
Schaefflers India vision: EUR1bn
in sales in 2020 from ~EUR0.3bn
in CY12; more than 15% CAGR
Plans afoot to make India
significant hub for exports to US,
Europe and Asia

Miscellaneous
36

Focusing capital expenditure on growth regions such as India, China, and Russia is part of
the Schaeffler Groups strategy to protect its competitive edge and leading position in the
market. This will help the company to continue surpassing the market growth.

New product pipeline to spur growth
FAG was successful in adding over 100 new products to its portfolio in 2012. The company
will invest close to INR500mn on R&D for the group in India, and will double the number of
engineers to 400 over the next couple of years.

FAG Double-Row Angular Contact Bearings X-life
Double row angular contact ball bearings of X-life quality offer a longer operating life,
especially in use under axial load conditions.

They are therefore particularly suitable for use in pumps and agricultural machinery, for
applications in conveying equipment and packaging equipment, elevators and compressors.

FAG Spherical Roller Bearings E1 X-life
FAG E1 spherical roller bearings are used in all kinds of applications where heavy loads have
to be accommodated or where shaft deflections or misalignments of bearing seats must be
compensated for. They operate reliably in the harshest environmental conditions, for
example in gearboxes, paper machines, construction machinery and vibrating machinery.

FAG Cylindrical Roller Bearings X-life
With improved surface quality, the load ratings of X-life cylindrical roller bearings have been
increased even further in engineering applications. The dynamic load rating is 18 % higher
than in the older style used cylindrical roller bearings. The basic rating life has increased by
up to 70 %.

Strategic Roadmap 2016
Launched
Represents a shared vision of
Schaeffler Asia Pacific region.
Regional goals and strategic
direction to realise a strong
competitive position for Schaeffler
in this region articulated.
In 2012, FAG was presented with
an award for Excellence in Design
and Development by Maruti Suzuki
India

37

FAG Bearings
Valuation

FAG, the second largest bearing player in India, is structurally well positioned with strong
demand drivers for auto and industrial bearings. Strong gross block addition (doubling over
CY10-15E), demand uptick and localisation of industrial traded sales will be catalysts to the
company posting 31% and 32% earnings in CY14E and CY15E, respectively, post -24%
inCY13. A diversified portfolio, leadership in the differentiated cylindrical and spherical
bearings, a formidable service network and strong parentage equip it with significant
competitive advantage. We believe localisation of industrial sales will lead to narrowing of
the discount to the market leader, SKF, rendering improved visibility to gross margin
expansion.

Given the weak macro environment, we believe FAG maintaining its cash flow is
commendable and this could improve in the near future despite the huge capex. We expect
free cash flow over the next two years to be INR4.4bn (versus INR3.4bn in past six years).
As a result, we expect the companys net cash to stand augmented by 1.7x to
INR339/share in CY15E (22% of current market cap). Further, the companys EBITDA margin
is likely to expand led by new value-added products, gross margin expansion and operating
leverage. The company has a strong earnings growth trajectory, debt-free balance sheet and
robust cash flows with healthy average RoE and core RoCE of ~22% and 44%, respectively.

At current market price, FAG is trading at P/E of 16.3x CY14 and 12.3x CY15 earnings
estimates. It is trading slightly above mid-end of its historic valuation; on a relative basis,
SKF is trading at 12x CY15E below mid band of its valuation. FAG is expected to deliver net
profit CAGR of 31% over CY13-15E. We believe the stock is a re-rating candidate given its
consistent track record, direct beneficiary of localisation of industrial sales, strong returns
profile and earnings growth trajectory. Hence, we initiate coverage on the stock with BUY
recommendation and target price of INR2,022 based on 16x CY15E EPS, at higher band of its
valuation.

Table 5: Peer comparison

Source: Bloomberg, Edelweiss research
Note: *NRB and Global players estimates are as per bloomberg

Companies Currency Mcap
(INR bn) CY13/FY14E CY14/FY15E CY15/FY16E CY13/FY14E CY14/FY15E CY15/FY16E CY13/FY14E CY14/FY15E CY15/FY16E
Domestic Players
SKF INR 33.5 (7.8) 22.7 29.9 19.1 15.6 12.0 14.3 15.7 17.9
FAG INR 25.9 (23.5) 30.6 31.9 21.3 16.3 12.3 12.8 13.8 14.9
NRB* INR 4.8 (17.9) 37.5 20.0 9.0 6.5 5.5 21.9 17.9 22.0
Global Players*
Ti mken USD 361 (33.7) 19.4 22.0 19.3 16.2 13.3 14.1 21.4 27.7
SKF AB SEK 689 (24.4) 47.8 17.8 20.6 13.9 11.8 4.4 24.8 25.9
NSK JPY 37829 112.4 35.5 12.8 18.2 13.4 11.9 10.9 12.1 11.9
ROE (%) P/E (x) Core EPS Growth (%)
Stock to trade at a premium to its
historic valuation at 16x CY15E
with strong capacity uptick in
manufacturing sales, earnings
CAGR of 31%, direct beneficiary
of rising localisation; strong focus
area of the parent

Miscellaneous
38

Chart 6: One year forward P/E


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39

FAG Bearings
Key Risks

Delay in recovery in key segments
Slowdown in four-wheeler sales momentum can impact our sales growth projections since
four wheelers and commercial vehicles together contribute ~75% to FAGs 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. Netting exports, which
are 14% of sales, the companys overall net imports constitute 19% of net sales. However,
the impact of forex fluctuation is limited as FAG follows a policy of hedging exposure over 4
quarters.

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.

Japanese competition
International players like NSK, Nachi and Koyo are setting up base in India. This will heighten
competition in the auto bearings industry over the long term.

Miscellaneous
40

Company Description

Fig. 1: Evolution of FAG Bearings India

Source: Company

About FAG Bearings India
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. The companys business spans across
rolling bearings and services systems. Within bearings, the company caters to automobile
OEM bearings, automobile aftermarket bearings, industrial OEM bearings, industrial after
market bearings and exports. Strong technological prowess and rich product portfolio
enable the company to partner with OEMs right from the product development stage. It has
a technology licence agreement with parent and pays royalty and technical fees of ~2% of
revenues.

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 32% of overall revenue, which are majorly imported from overseas
Schaeffler Group companies. The company also exports 14% of its sales to the Schaeffler
Group.

FAG has plants at Vadodara with capacity of 51 mn, production of 78mn units and operating
at 154% utilization as on CY11. In terms of reach, the company has a pan-India presence
with ~200 distributors. The Savli plant, which was set up in CY12, increased companys ball
bearings capacity by 36mn units to 86.9 mn.

In India, FAGs exposure to the auto segment is 35%. 14% of sales are catered to by exports.
Within the auto segment, the company has high exposure to PV and CV segments (catering
to ~44% and ~30% of auto OEM bearings revenues respectively). Within automotive
revenue, ~66% is catered to OEMs and ~34% comes from replacement. Balance 51% of
overall revenues comes from industrial sales. Within industrial, ~65% is catered to OEMs
and 35% comes from replacement.

FAGs joint venture company, FAG Roller Bearings, manufactures taper roller bearings at its
Chakan unit near Pune.

2012
Savli plant commiss-
ioned atVadodara
which caters to ball
bearings and large
size industrial bearings
1964
Production
commenced at
Vadodara Plant
1975
Expansion:
Railway bearing
plant was
commissioned
1992
Brand name
changed from
NORMA to FAG
1999
Commissioned
India's first Wheel
Bearing Plant at
Vadodara Limited from
Norma HoffmanPlant
2003
Validation Centre
set up
at Vadodara
2010
Commenced
advanced X-life
bearing
production at
Vadodara
1962
Precision
Bearings India
Limited was
incorporated
1969
FAG Germany
acquired shares
from Norma
Hoffman
1986
Name of the
Company changed to
FAG Bearings India
LimitedNorma
HoffmanPlant
1997
Commissioned
export oriented
unit for cylindrical
roller bearings
2001
FAG
became a
part of Schaeffler
Group
2007
Introduced
E1 Spherical
Roller Bearings
2011
Commissioned
3rd Generation
Wheel Bearing
Plant at
Vadodara
FAG is No.2 player in Indian
bearings market with ~17%
market share

41

FAG Bearings
The company has identified India as one of its major growth markets. FAG, a listed entity in
India, currently has two production sites and one R&D center employing over 1,580. The
companys plants are situated at Maneja (Baroda) and Savli (Baroda). Parent also has
unlisted companies INA India (majorly catering to needle roller bearings) and Luk India
(~22% market share in clutches). These companies posted sales of INR5bn and INR2.7bn,
respectively, in Dec 2012 and Dec 2010 respectively. INAs plant is located at Talegaon
(Pune) and Luks plant is located at Hosur (Tamil Nadu).

Chart 7: Business mix as on CY12


Chart 6: Segment wise applications


Auto OEMs -
4W,CV
17%
Auto OEMs -
2W
6%
Auto
aftermarket
12%
Industrial
OEMs
33%
Industrial
aftermarket
18%
Exports
14%
Segment Product
Automotive Bal l beari ngs
Tapered rol l er beari ngs
Barrel rol l er beari ngs
Automotive Aftermarket Deep grove bal l beari ngs
Seal s
Industrial Spheri cal and cyl i ndri cal rol l er beari ngs
Angul ar contact bal l beari ngs
Axi al Spheri cal rol l er bearings
Sel f al i gni ng beari ng
Industrial aftermarket Repl acement part wi th servi ce sol uti ons
Manufactured
67%
Traded
32%
Others
1%

Miscellaneous
42

Chart 8: Sales break up trend


Over CY07-12, trading revenues CAGR is at 24% versus 15% for manufactured. Going
forward we estimate 21% CAGR in manufacturing sales and 16% CAGR in trading sales over
CY13-15E.

Chart 9: Sales break up


0
4,800
9,600
14,400
19,200
24,000
CY08 CY09 CY10 CY11 CY12 CY13E CY14E CY15E
(
I
N
R

m
n
)
Manufactured Traded
0
3,400
6,800
10,200
13,600
17,000
(
I
N
R

m
n
)
Domestic Exports
Manufacturing to be on an
uptrend with 21% CAGR in sales
expected over CY13-15E versus
16% CAGR in traded sales

43

FAG Bearings
Chart 10: Export sales trend


Over CY07-12, domestic as well as exports sales posted 18% CAGR. We have assumed only
15% CAGR in sales in exports over CY13-15E. This we believe is conservative going by the
parents vision to make India a significant hub for exports to the US, Europe and Asia over
the long term.

Schaeffler Group (Global)
The Schaeffler Group of Germany is the second leading global supplier in bearings with
revenue of EUR11bn (as of CY12) and 18% operating margin. But the revenues generated
from operations in direct competition with SKF are estimated to be closer to ~EUR7bn.
Being a second largest bearing company, FAG has been in existence since 1883. Schaeffler
develops bearings with its INA, LuK and FAG brands. The Schaeffler Group is an international
supplier to the automotive industry and is one of the worlds leading manufacturer of roller
bearings and linear products. Group companies are based in Germany and are controlled by
the Schaeffler family. Europe is the largest market with 59% of groups revenues;
automotive is the major division, representing 69% of sales. With over 76,000 employees
worldwide, Schaeffler is one of the largest German and European industrial companies in
family ownership. With 180 locations in over 50 countries and more than 70 plants, it has a
robust worldwide network.

The company has two main divisions (auto and industrial) with top three positions in core
market sectors. FAG has a highly diversified base. Within the automotive division
contributing 69% to overall sales, FAG is catering to ~7,500 customers, with top 10
customers contributing 53% to automotive sales. Within automotives company is catering
to engines, transmission and chassis divisions. Its industrial division, which contributes 31%
to overall sales, caters to ~17,000 customers, with top 10 customers contributing ~16% of
automotive sales. Customers from around 60 varied industrial sectors rely on rolling and
plain bearings, linear guides and direct drives from INA and FAG brands. With a product
range consisting of around 40,000 catalogue products as well as numerous special designs,
the Schaeffler Group has the widest product range in the sector.

5.0
9.0
13.0
17.0
21.0
25.0
400
1,040
1,680
2,320
2,960
3,600
CY09 CY10 CY11 CY12 CY13E CY14E CY15E
(
%
)
(
I
N
R

m
n
)
Exports % of revenues
Exports constitute 14% of sales;
having posted 18% CAGR over
CY07-12, we have assumed 15%
CAGR going forward

Schaeffler Group of Germany is the
second leading global supplier in
bearings with revenues of 11bn (as
of CY12), 18% market share and
strong 18% operating margin.

Miscellaneous
44

Chart 11: CY12: Sales by region

Source: Schaeffler Group, Edelweiss research

Chart 12: Schaefflers sales break up (2012)

Source: Schaeffler Group, Edelweiss research

Around 6,000 engineers work at its 40 R&D facilities. The group owns the rights to more
than 18,500 patents & patent applications and more than 1,850 inventions are filed for
patent applications every year. R&D expenses surged 19.8% in CY12 to EUR593mn (CY11:
EUR495mn) or 5.3% of revenue (CY11: 4.6%). The automotive division spent EUR429mn
(CY11: EUR 361 m) or 5.6% of revenue (CY11: 5.0%) in CY12 and the industrial division
incurred R&D expenses of EUR164mn (CY11: EUR134mn) or 4.8% of revenue (CY11: 3.9%).

Europe
31%
North America
15%
South America
5%
Germany
26%
Asia/Pacific
23%
CY12
Automotive
69%
Industrial
31%
CY12
Parents R&D expenses grew
19.8% to EUR593mn in CY12 and
contributed 5.3% to sales. Going
forward, management intends to
maintain this at 5% of global
sales

45

FAG Bearings
Chart 13: Innovation: A key success factor

Source: Schaeffler group, Edelweiss research

Globally, the company has been generating above industry average profitability and revenue
growth and targets to maintain the same led by the following:
Strong market position in attractive markets.
Increasing content per vehicle due to innovative product offering driving future trends
(downsizing, fuel efficiency, emission control, improved security, increased comfort).
Successful product launches of recent years are getting into high volume production.
Increasing market share in high growth markets such as China, India and Brazil.
Continued R&D expense at ~5% of sales.

500
800
1,100
1,400
1,700
2,000
2007 2008 2009 2010 2011 2012
(
N
o
s
.
)
Number of patent registrations

Miscellaneous
46

Financial Outlook

Strong outperformance with industry leading margin
Historically, FAG has outpaced peers like SKF, NRB and Timken in terms of sales growth
across the years, owing to extensive exposure to the high growth PV industry. This is
alongside industry leading margins. Low-margin traded goods account for ~32% of revenue,
which have increased from CY07. Going ahead, with manufacturing substituting the traded
industrial sales over a long time, we expect the company to continue to post strong industry
leading margin. We have assumed EBITDA margin to move from 12.8% to 14.9% over CY13-
15E, still lower than historic 17% OPM.

Auto revenue to post 19% CAGR over CY13-15E
With sizeable exposure to four wheelers (~74% of auto OEM bearings revenue), we expect
FAG to post 15% CAGR in OEM sales over CY13-15E led by improving rural demand and
aggressive product launches by OEMs. Over the next 18 months, ~16-17 new product
launches are expected across OEMs. As a result, we expect FAGs auto OEM bearings (23%
of overall sales) revenue to grow 12% in CY14E and 19% in CY15E.

FAG derives ~34% of automotive revenue from the auto aftermarket segment (12% of
overall sales). With past OEM cycle driving sales, we expect 25% CAGR in auto replacement
sales over CY13-15E. Also, wide distribution network (more than 200 distributors) and
preference for organised players will drive sales in this segment. As a result, we expect auto
bearings (OEM + replacement) segment revenue to grow 20% in CY14E and 19% in CY15E.

Chart 14: Auto bearings on an uptick


Manufacturing trajectory better than traded
The industrial bearings segment is expected to grow in H2CY14 riding the anticipated revival
in the manufacturing sector (IIP) in CY14. FAG derives ~32% of revenue from the traded
industrial sector. Also, it derives 18% of overall sales from the manufactured industrial
segment. Improvement in key segments such as railways, power and mining sectors will also
drive demand. Also, the companys Savli plant, commissioned in October 2012, in
(6.0)
3.2
12.4
21.6
30.8
40.0
2,200
3,500
4,800
6,100
7,400
8,700
(
%
)
(
I
N
R

m
n
)
Manufacturing domestic auto sales % growth
Strong exposure to passenger
vehicles and commercial vehicles
at 44% and 30%, respectively, of
OEM revenue to drive strong
19% sales CAGR

47

FAG Bearings
conjunction with further capex expected over the next three years will drive sales growth
led by localisation of imported traded bearings.

We anticipate the company to post strong growth riding its massive capacity expansion of
INR3.5bn (85% expansion of CY10 gross block). Further, capex of INR2bn (~28% expansion of
CY13 gross block) is planned in the medium term. As a result, overall gross block will
increase 2.1x over CY10-15E. The Savli plant has a capacity of 36mn units per year of ball
bearings and 12,000 pieces per year of large scale bearings. We have assumed INR 5.7bn of
incremental manufacturing sales over CY11-15 over gross block addition of INR5.5bn. The
company has historically generated core fixed asset turn at 1.8x, while we have assumed
1.02x. We have assumed 21% CAGR in manufacturing sales over CY13-15 versus 15% CAGR
in past five years. Also, with growing manufacturing, the traded sales trajectory will be
lower at 16% CAGR over CY13-15E.

Chart 15: 21% CAGR in manufactured vs 15% CAGR in traded sales over CY13-15E


Higher operating leverage, lower traded sales to boost margin
We believe EBITDA margin is likely to surge on account of increasing capacity utilisation and
gradual shifting from trading to manufacturing in sales. With better operating leverage and
lower traded sales (import substitution) we expect improvement in gross margin and
operating margin by 67bps and 203bps to 37.9% and 14.9%, respectively, over CY13-15E.
Hence, we expect 28% CAGR in operating profit over CY13-15E. The margins we have
assumed are still lower than historic average EBITDA margin of 17% over past five years.

0
4,800
9,600
14,400
19,200
24,000
(
I
N
R

m
n
)
Manufactured Traded
Strong capex to drive
manufacturing sales at 21%
CAGR versus 16% CAGR in traded
sales over CY13-15E

Miscellaneous
48

Chart 16 : Margin set to improve


Chart 17: Robust PAT growth trajectory


We expect FAG to post PAT CAGR of 31% over CY13-15E (CY07-15 CAGR 15%) primarily led
by manufacturing upsurge and margin uptick with operating leverage.

Higher margin, asset turnover to boost return ratios
While the overall core gross fixed asset turn has dipped to 1.5x (from historic average of
1.8x in past three years), we expect the asset turn to improve to 1.7x over the next two
years despite further capital outlay over the next two-three years led by ramp up in
production with demand uptick and gradual shift in mix in favour of manufacturing sales.
This will enhance operating margin. Ergo, with increase in capacity utilisation, we expect
RoE and core RoCE to jump from 13.1% and 21.8% in CY13 to 17.1% and 34.8% in CY15E,
respectively.

10.0
13.0
16.0
19.0
22.0
25.0
500
1,100
1,700
2,300
2,900
3,500
CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15
(
%
)
(
I
N
R

m
n
)
EBITDA EBITDA margin (%)
616
1,002
1,389
1,775
2,162
2,548
CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14E CY15E
(
I
N
R

m
n
)
Operating profit to post 28%
CAGR over CY13-15E assuming
OPM at 14.9% in CY15E lower
than historic average OPM of
17%

49

FAG Bearings
Chart 18: RoE and Core RoCE (%) to trend up with improving margins


Strong cash reserves
FAG is debt free with INR3.2bn in cash (INR195/share) as on CY13, ~12% of market cap. This
is including the loans given to group (associate) companies. The company has been
generating strong operating cash flow over the years. Working capital has been low. It
incurred significant capex (INR3.5bn) over the past three years. Further, it will incur capex of
INR2bn over CY13-15E. Despite this, we expect free cash flow over the next two years to be
INR4.4bn (versus INR3.4bn in past six years). Hence, we expect the companys net cash to
stand augmented by 1.7x to INR339/share in CY15 (~22% of current market cap). We
expect net cash per share at INR245 (16% of current market cap) and INR339 (22% of current
market cap) for CY14E and CY15E, respectively, from INR195per share currently.

Chart 19: Strong cash flow generation


10.0
22.2
34.4
46.6
58.8
71.0
CY09 CY10 CY11 CY12 CY13 CY14E CY15E
(
%
)
RoE (%) Core RoCE (%)
(800)
200
1,200
2,200
3,200
4,200
CY09 CY10 CY11 CY12 CY13E CY14E CY15E
(
I
N
R

m
n
)
Operating cash flow Free cash flow
With strong free cash flow we
expect net cash per share to
stand augmented by 1.7x to
INR339/share in CY15E (22% of
current market cap)
With improving asset turn we
expect RoE to jump 400bps to
17.1% and core RoCE to catapult
1300bps to 34.8%; historic
average of 23.2% and 47.9%
respectively

Miscellaneous
50

Financial Statements

Key assumptions
Macro
GDP(Y-o-Y %) 5.0 4.8 5.4 6.3
Inflation (Avg) 7.4 6.2 5.5 6.0
Repo rate (exit rate) 7.5 8.0 7.5 7.0
USD/INR (Avg) 55 62 60 58
Industry growth assumptions (%)
Auto OEM (2W) volume growth 2.1 6.0 8.0 10.0
Auto OEM PV volume growth 2.7 (5.5) 6.0 12.0
Auto CV industry volume growth (10.5) (19.0) 11.0 23.0
Company growth assumptions (%)
Manufactured sales (%)
Auto 2W OEM volume growth 2.1 6.0 8.0 10.0
Auto PV OEM volume growth 2.7 (4.5) 7.0 13.0
Auto CV OEM volume growth (10.5) (19.0) 11.0 23.0
Auto aftermarket sales growth (17.3) 25.3 31.5 18.8
Industrial sales growth 10.2 (18.0) 10.0 22.0
Export revenue growth 28.1 15.0 15.0 15.0
Traded sales (%)
Industrial sales growth 11.1 (10.0) 10.0 10.0
Revenue mix (% of gross sales)
Manufactured 68.2 70.9 72.0 72.4
Traded 31.8 29.1 28.0 27.6
Gross margin
Manufacturing gross margin (%) 49.2 49.0 49.0 49.0
Traded gross margin (%) 15.1 12.5 12.5 12.5
Cost assumptions
Raw mat. cost as % net sales 62.7 62.7 62.2 62.1
Employee cost as % of net sales 7.8 8.7 8.5 8.4
Administrative exp as % of net sales 14.2 15.9 15.7 15.6
Income statement (INR mn)
Net revenues 14,467 14,300 16,764 20,343
Raw material costs 9,076 8,971 10,431 12,626
Gross profit 5,391 5,329 6,333 7,717
Employee expenses 1,129 1,191 1,380 1,586
Other expenses 2,058 2,302 2,634 3,107
Operating expenses 3,187 3,493 4,014 4,693
Total expenditure 12,262 12,464 14,445 17,319
EBITDA 2,204 1,836 2,319 3,024
Depreciation & amortisation 303 433 456 497
EBIT 1,901 1,403 1,863 2,527
Interest expense 13 8 0 0
Other income 446 459 512 607
Profit before tax 2335 1854 2375 3134
Provision for tax 743 636 784 1034
Core profit 1,592 1,218 1,591 2,100
Extraordinary/ Prior period items - - - -
Profit after tax 1,592 1,218 1,591 2,100
Equity shares outstanding (mn) 16.6 16.6 16.6 16.6
Core EPS (INR) basic 95.8 73.3 95.8 126.3
Diluted shares (mn) 16.6 16.6 16.6 16.6
EPS (INR) diluted 95.8 73.3 95.8 126.3
CEPS 77.6 47.3 68.3 96.5
DPS 5.0 6.0 8.0 11.0
Dividend payout (%) 5.2 8.2 8.4 8.7
Common size metrics (% net revenues)
Gross margin 37.3 37.3 37.8 37.9
Operating expenses 22.0 24.4 23.9 23.1
EBITDA margins 15.2 12.8 13.8 14.9
EBIT margin 13.1 9.8 11.1 12.4
Interest 0.1 0.1 0.0 0.0
Net profit margin 11.0 8.5 9.5 10.3
Growth metrics (%)
Revenues 10.6 (1.1) 17.2 21.3
EBITDA (13.2) (16.7) 26.3 30.4
PBT (10.5) (20.6) 28.1 31.9
Core Net profit (9.5) (23.5) 30.6 31.9
Core EPS (9.5) (23.5) 30.6 31.9

51

FAG Bearings

Balance sheet (INR mn)
As on 31st December CY12 CY13 CY14E CY15E
Share capital 166 166 166 166
Reserves & surplus 8,629 9,709 11,145 13,031
Shareholder equity 8,795 9,876 11,312 13,198
Deferred tax liability/asset 64 174 - -
Sources of funds 8,859 10,050 11,312 13,198
Gross fixed assets 5,953 7,089 7,994 9,029
Accumulated depreciation 3,171 3,604 4,059 4,556
Tangible assets 2,782 3,485 3,935 4,473
Intangible assets 9 10 10 10
CWIP (incl. intangible) 1,136 640 835 700
Total net fixed assets 3,927 4,135 4,780 5,183
Non current investments 44 44 44 44
Investments 44 44 44 44
Cash and cash equivalents 1,948 2,346 3,395 4,880
Inventories 1,422 1,706 1,860 2,053
Sundry debtors 2,547 2,906 2,326 2,629
Loans and advances 1,510 2,112 2,112 2,112
Other assets 39 65 65 65
Total current assets (ex cash) 5,518 6,790 6,364 6,859
Trade payable 1,786 2,405 2,392 2,843
Other current liabilities & prov. 791 859 878 926
Total current liabilities & prov. 2,577 3,264 3,270 3,769
Net current assets (ex cash) 2,941 3,525 3,093 3,091
Application of funds 8,860 10,050 11,312 13,198
Book value per share (INR) 529 594 681 794
Free cash flow (INR mn)
Net profit 1,592 1,218 1,591 2,100
Add: Depreciation 303 433 456 497
Add: Int & other non-cash items (150) 355 544 855
Gross cash flow 1,744 2,006 2,591 3,451
Less: Changes in working cap. 374 (44) (432) (3)
Operating cash flow 1,371 2,050 3,023 3,454
Less: Capex 1,407 640 1,100 900
Free cash flow (37) 1,410 1,923 2,554
Peer comparison valuation
Companies Mcap
(INR bn) CY13 CY14E CY15E CY13 CY14E CY15E CY13 CY14E CY15E CY13 CY14E CY15E
SKF 33.5 19.1 15.6 12.0 14.3 15.7 17.9 31.5 38.3 52.4 18 35 45
FAG 25.9 21.3 16.3 12.3 12.8 13.8 14.9 21.8 26.8 34.8 85 116 154
FCF/Share P/E (x) ROE (%) Core ROCE (%)
Cash flow metrics
Financing cash flow (206) (117) (156) (214)
Investing cash flow (1,721) (640) (1,100) (900)
Net cash flow (556) 1,294 1,767 2,340
Capex (1,407) (641) (1,100) (900)
Dividends paid (193) (117) (156) (214)
Profitability ratios
Core ROACE (%) 36.0 21.8 26.8 34.8
ROAE (%) 19.8 13.1 15.0 17.1
ROA (%) 19.7 12.9 14.9 17.1
Current ratio 2.1 2.1 1.9 1.8
Quick ratio 1.6 1.6 1.4 1.3
Cash ratio 0.8 0.7 1.0 1.3
Receivable turnover (x) 6.2 5.2 6.4 8.2
Inventory turnover (x) 6.0 5.7 5.8 6.5
Payables turnover (x) 5.1 4.3 4.3 4.8
Receivables (days) 59 70 57 44
Inventory (days) 61 64 62 57
Payables (days) 71 85 84 76
Cash conversion cycle (days) 49 48 35 25
Operating ratios (x)
Total asset turnover 1.8 1.5 1.6 1.7
Fixed asset turnover 2.7 2.2 2.2 2.4
Equity turnover 1.8 1.5 1.6 1.7
Core Fixed asset turnover 1.8 1.5 1.5 1.7
Valuation parameters
Diluted EPS (INR) 95.8 73.3 95.8 126.3
Y-o-Y growth (%) (9.5) (23.5) 30.6 31.9
CEPS (INR) 77.6 47.3 68.3 96.5
Diluted P/E (x) 16.3 21.3 16.3 12.3
P/BV (x) 2.9 2.6 2.3 2.0
EV/Sales (x) 1.6 1.5 1.2 0.9
EV/EBITDA (x) 10.2 11.7 8.8 6.3
Dividend yield(%) 0.3 0.4 0.5 0.7

Miscellaneous
52


Holding Top -10
Perc. Holding Perc. Holding
HDFC Trustee Co Ltd - HDFC Multiple Yield Fund - Plan 2005 4.41 IDFC Equity Oppertunity - Series I 2.81
Acacia Partners LP 3.63 ICICI Prundential Life Insurance Company Ltd 1.9
Sundaram mutual Fund A/c Sundaram Monthly Incom Plan - Aggressive Plan 3.51 Shree Capital Services Ltd 1.66
Acacia Institutional Partners LP 3.12 Franklin India Smaller Companies Fund 1.30
SBI Contra Fund 3.07 New India Assurance Company Ltd 1.29
*as per last available data
Bulk Deals
Date Acquirer / Seller B/S Qty Traded Price
5-Jul-12 ACACIA PARTNERS L.P S 223,500 1,505
5-Jul-12 ACACIA BANYAN PARTNERS P 223,500 1,505
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded

No Data Available

Additional Data
Directors Data
Avinash Gandhi Chairman R Sampath Kumar Director
Rajendra Anandpara Managing Director Kamlesh Tapadar Alternate Director
Bruno Krauss Director Yezad Kapadia Alternate Director
Frank Huber Director Raj Sarraf Company Secretary
Bernhard Steinruecke Director Robert Schullan Additional Director
Moreshwar Garde Director

Auditors - BSR & Co.



SKF India (SKF) is leading bearings company with overall industry and ball
bearing market shares at ~28% and 45%, respectively. By virtue of being
market leader, company will be a strong beneficiary of the cyclical uptick
in auto and industrials segments. High exposure to two-wheelers (58% of
auto OEM sales) will drive SKFs revenue. It is also well placed to
capitalise on structural opportunity of India becoming one of the major
manufacturing hubs of global OEMs. A strong distribution network (300
plus distributors, 20,000 retailers) renders after-market segment at ~47%
of revenues, insulating company from cyclical downturns. Expected
economic revival and higher capacity utilisation (~65% now) will be
catalysts to strong sales. We initiate coverage with BUY.

Well-diversified business model insulates from cyclicality
SKF has well-diversified segments and customer models, with auto and industrial
segments at ~45% and 49% of sales, respectively, and no customer contributing more
than 5% to sales. Diversification arms the company to gain from a cyclical uptick in
auto and industrial OEMs. Also, SKF derives significant revenue (~47%) from the after-
market segment, which reduces revenue cyclicality during economic downturns.

Indirect beneficiary of capacity expansion in industrial segment
The company imports major chunk of industrial bearings from SKF AB and partly
sources them from SKF Technologies (parents wholly-owned subsidiary). Ramping up
of capacity by SKF Technologies will yield localisation, reduction in lead time and cost
benefits. We expect the SKF Group to pass on some cost benefits to gain market share.
Rising localisation will catapult SKFs trading sales to 19% CAGR over CY13-15E. Also,
the sourcing model of semi-finished goods results in asset-light business model.

Outlook and valuations: On growth path; initiate with BUY
Uptick in manufacturing and traded sales along with improving capacity utilisation will
be catalysts to SKFs earnings catapulting 23% and 30% in CY14E and CY15E,
respectively. The stock is trading at 15.6x and 12.0x CY14E and CY15E EPS,
respectively, at a discount to historical mean valuation of 15x. We initiate coverage
with BUY and TP of INR795 (15x CY15E EPS), implying 26% upside from current level.

INITIATING COVERAGE
SKF INDIA
Geared for growth
EDELWEISS RATINGS
Absolute Rating BUY
Investment Characteristics Growth

MARKET DATA (R: SKFB .BO, B: SKF IN)
CMP : INR 642
Target Price : INR 795
52-week range (INR) : 700 / 432

Promoters *

53.6 53.6 53.6
MF's, FI's & BKs
17.6 15.8 15.3
FII's 14.8 16.4 16.9
Others 14.0 14.3 14.3
: NIL


Sensex Stock
Stock over
Sensex
1 month (2.8) 0.5 3.3
3 months (1.9) 3.6 5.4
12 months 4.9 15.7 10.8

Shradha Sheth
+91 22 6623 3308

Manoj Bahety, CFA
+91 22 6623 3362

February 19, 2014

(Click on image
to view video)
Financials
Year to December CY12 CY13E CY14E CY15E
EBITDA (INR mn) 2,584 2,499 2,958 3,788
Core profi t (INR mn) 1,901 1,752 2,151 2,795
Di l uted shares (mn) 53 53 53 53
EPS (INR) 36.0 30.3 40.8 53.0
P/E (x) 17.6 20.9 15.6 12.0
EV/EBITDA (x) 10.5 10.6 8.4 6.0
ROAE (%) 17.5 14.3 15.7 17.9

Bearings
54


Investment Rationale

Market leader with strong parentage ensures robust positioning
SKF is the market leader with ~28% and ~45% shares in the overall bearings industry and
ball bearings segment, respectively. Also, dominant position in the deep grove ball bearing
segment equips it to benefit from an uptick in the auto as well industrial segments. Parent,
SKF AB, is the worlds largest bearing maker with a turnover of ~EUR7bn as on CY12 and
global ball bearing market share of ~20%. Parents strong back up bolsters SKFs technology
prowess. The company is drawing plans to emerge as a service solution player by
introducing innovative products and solutions from the parents stable, rather than
discounting products to battle the downturn. New products contributed ~12% to overall
sales in CY12 and managements target is to increase this to ~20-25% over next 3 years.
This, coupled with a formidable distribution network of more than 300 distributors and
20,000 retailers, will aid SKF capture larger pie of the market. FAG (~17% market share),
Timken India (~8% market share) and NRB Bearing (~7% market share) are its key
competitors.

Diversified model insulates from cyclicality
SKF has developed a well-diversified business model, suffusing it with resilience to
withstand headwinds of cyclical downturn in any particular segment as well as customers.
With domestic capacities substantially catering to two-wheeler and passenger car demand,
the company has a relatively de-risked revenue profile, both in industrial and automobile
segments. It derives around 45% revenue from the domestic automotive segment, within
which 69% contribution is from OEMs and 31% from replacement. Around 49% of revenue
comes from the industrial segment, within which OEMs contribute 33% and replacement
67%; exports contribute the balance 6%. This diversification equips the company to gain
from a cyclical uptick in auto and industrial OEMs. Also, SKF derives significant portion
(~47%) of revenue from the after-market segment, which reduces cyclicality in revenue,
especially during economic downturns. Moreover, no single customer contributes more
than ~5% to revenue, which insulates it further from cut-back in orders from any particular
segment.

Enhanced capacity utilisation to drive growth
Riding strong product demand, SKF had embarked on an aggressive capex of INR2.3bn over
CY10-12 across business segments to augment capacity from 132mn in CY09 to 181mn in
CY11.

Market leader in bearings
industry with 28% market share;
enjoys strong product positioning
in ball bearings with 45% market
share

Diversified revenue stream with
45% of sales from automotives,
49% from industrials, 6% from
exports; overall replacement at
47% insulates from cyclicality

In such challenging times, we
have been working very closely
with customers to improve our
share of business. As a result,
even if our customers sales have
declined, our decline has not been
very sharp.
-Mr. Shishir Joshipura,
Managing Director

55

SKF India
Chart 1: Improving asset turn


However, with drop in demand, SKFs current capacity utilisation stands at 60-65%
compared to 75% and 80% over the past three and five years, respectively. Going forward,
with an improvement in two-wheeler sales (~58% of its OEM sales) and pent up demand in
other segments we expect 17% CAGR in manufacturing sales over CY13-15E versus 7% CAGR
in past five years.

Chart 2: Underutilised capacity

0.0
0.8
1.6
2.4
3.2
4.0
5,200
6,600
8,000
9,400
10,800
12,200
(
x
)
(
I
N
R

m
n
)
Gross block Asset turn (x)
59.0
69.2
79.4
89.6
99.8
110.0
77,500
99,500
121,500
143,500
165,500
187,500
CY07 CY08 CY09 CY10 CY11
(
%
)
(
N
o
s

'
0
0
0
)
Installed capacity (in Nos' 000) Production (in Nos' 000)
Sales qty (in Nos' 000) Capacity utilization (%)
One clear dimension is that
everybody is worried about
improving their asset utilization,
which justifies our positioning
-Shishir Joshipura,
Managing Director

Bearings
56

Chart 3: Manufacturing sales uptick


Localisation of high-margin industrial segment to drive growth
The company does not manufacture industrial bearings, but majorly imports them from the
parent company and partially sources them from SKF Technologies (parents wholly-owned
subsidiary), which started domestic manufacturing of industrial bearings in CY10 end. The
benefits of domestic sourcing will be significant as it will reduce lead time. We expect the
SKF Group to pass on some of the benefits to customers to gain market share.

The traded bearings segments (import + sourced from SKF Technologies; 43% of overall
revenue) sales posted 9% CAGR over past five years and averaged 15% gross margin.
Increasing localisation will boost the companys sales. As a result, we have assumed 19%
CAGR over CY13-15 versus 17% CAGR expected for manufactured bearings segment over
the same period.

Chart 4: Traded sales to grow strongly led by localisation


(6.0)
2.6
11.2
19.8
28.4
37.0
5,000
7,200
9,400
11,600
13,800
16,000
(
%
)
(
I
N
R

m
n
)
Manufactured domestic auto sales % growth
(14.0)
(2.6)
8.8
20.2
31.6
43.0
5,500
7,500
9,500
11,500
13,500
15,500
(
%
)
(
I
N
R

m
n
)
Traded bearings % growth
With capacity utilisation at ~65%
and expected uptick in its key
OEM segment two-wheeler
accounts for 58% of its overall
auto OEM sales - we expect
manufacturing sales to log 17%
CAGR over CY13-15E
On account of being ahead in
terms of capacity commissioning,
we expect traded sales to
increase at 19% CAGR over CY13-
15E, led by rising industrial
demand

57

SKF India
SKF is well equipped to ride the strong benefits of increasing localisation led by new product
launches and healthy distribution network. Also, having established its base since March
2010, SKF Technologies has a lead over FAG, which commenced operations in October 2012.

Higher operating leverage to boost EBIDTA margin
With better operating leverage led by increasing capacity utilisation, we have estimated
EBITDA margin to improve 100bps over CY13-15 to 12.2%. Hence, we expect 23% CAGR in
operating profit over CY13-15E. Historically, SKF has generated an average EBITDA margin of
12.4% over the past six years.

Chart 5: EBITDA margin set to improve


7.0
9.6
12.2
14.8
17.4
20.0
(
%
)

Bearings
58

Parents support to sustain growth

Strengthening R&D to engineer innovation
SKF AB increased investment in R&D by 10% YoY and a number of first-time patents by 30%
in CY12. Bolstered by a strong global R&D network, the parent will considerably strengthen
innovation capabilities in Asia-Pacific to cater to customers in the region. SKF AB has opened
a Global Testing Center in Bengaluru to focus on technology and product development (it
has two centers in AsiaIndia and Shanghai). Also, it opened a solutions factory in Pune
which is a one-stop shop for all technology platformsbearings & units, seals, mechatronics,
services and lubrication solutions. It has a total of 21 solutions factories worldwide.

Globally, SKF ABs plan is to maintain a lead in patent applications by continuously
innovating and investing in R&D. In CY12, the groups R&D expenses grew 10% to
USD237mn or 2.5 % of revenue (prior year: 2.2%). These investments have resulted in
numerous innovations, laying the ground for new standards, products and solutions in the
bearing industry and also in other platforms e.g., preventive maintenance and automated
lubrication systems. In 2012, SKF AB recorded 663 invention disclosures and successfully
applied for 421 first filing patent applications. In India, led by its R&D capability, SKF was
recognised by Maruti Suzuki India as the preferred supplier towards local R&D capability
development.

Investing to enhance Asia-Pacific footprint
SKF AB aims to further expand its local production network. Asia currently accounts for 30%
of the groups production sites, 24% of net sales and 26% of employees. Asia Pacific is one of
the key regions where growth and sales will be highest for the group over the long term.
Investments of USD118mn have been earmarked over the next few years. Out of this, the
group invested around USD88mn in China last year for a new bearing and truck hub factory.
Focusing on capital expenditure on growth regions such as China and India is part of the SKF
ABs strategy to protect its competitive edge and leading position in the market.

SKF AB has set the following financial targets at the group level over the longer term:
15% operating margin.
8% annual sales growth in local currencies.
Having attained average RoCE of 21% in past seven years, the parent has set target of
27% RoCE.

Strong product pipeline to spur market share
SKF is taking concrete steps to venture into value-added products, which will not only
increase visibility and drive revenue, but also help maintain and improve margin going
forward. New products contributed 12-13% to the companys revenue in CY13 and it is
targeting to increase the same to 20% by FY16. By combining over 100 years of engineering
knowledge, SKF AB and SKF India are developing innovative products. Some of the
significant product developments in the past two years include:

SKF India received the Gold
award for quality from Bajaj Auto
it has been supplying Zero
Defect products since the past
two years
Some CV companies have
extended warranties to
4,00,000kms from 30,000kms
earlier. SKF has the technology to
provide such enhancements as
European CV providers usually
provide warranty for
16,00,000kms

59

SKF India
New SKF low-friction seal
It reduces friction compared to conventional seals and reduces vehicle CO2 emission. It has
extended life and less oil leakage, leading to waste reduction.

Fig. 1: Low-friction seal

New SKF low-weight hub bearing units
Primarily used in automotive wheel ends (in light commercial vehicles and premium cars), it
has low weight which helps reduce fuel consumption.

Fig. 2: Low-weight hub bearing units

New SKF nautilus range extension
This is for the wind energy requirements specifically designed to support main shaft in wind
turbines between 1.5 to 6MW. The range increases reliability, reduces weight and costs.

Fig. 3: Nautilus range extension

New sealed deep groove Ball Bearing
It reduces frictional losses and is designed for light to normal load applications and enables
longer bearing service life. It is suitable for applications ranging from electric motors and
two-wheelers to industrial conveyors and water pumps.

Fig. 4: Sealed deep groove Ball Bearing

Source: Company

Contribution of new value-added
products expected to increase
from 12-13% currently to ~20%
of sales by CY15E

Bearings
60

Upgraded self explorer self-aligning roller bearings
The roller bearings here are upgraded with better wear resistance. This was done through a
new heat treatment that substantially improves hardness of the bearing steel without
affecting toughness.

Fig. 5: Self-aligning roller bearings

Source: Company

SKF AB has a technical centre in Bengaluru which employs 200 plus engineers and has a
dedicated lubrication center and product investigation center to investigate field areas and
a mechatronics lab to develop sensor bearings and bearings for medical equipment.

61

SKF India
Valuation

Riding robust demand for auto and industrial bearings, we expect SKFs earnings to surge 23%
and 30% in CY14E and CY15E, respectively, post (-8%) performance in CY13E. Over the long
term, we anticipate the company to be a strong beneficiary of localisation in industrial
segment with an edge over competition by virtue of having a plant in place in CY10. SKFs cash
flow management in a weak macro environment has been commendable and we believe this
could improve in the near future with the potential tapering of capex. We estimate the
company to generate free cash flow of INR5.15bn over CY13-15 and it will augment CY12 net
cash/share by 1.88x to INR197 in CY15E (31% of current market cap). Further, the companys
EBITDA margin is likely to expand led by new value-added products and better operating
leverage. It has a strong earnings growth trajectory, debt-free balance sheet, robust cash flows
with healthy average RoE and core RoCE of 20% and 42%, respectively.

The stock is trading at a P/E of 15.6x and 12.0x CY14E and CY15E EPS, respectively which is
at a discount to its historic mean valuations. Anchored by its strong brand, healthy
distribution network and global parentage we initiate coverage with BUY recommendation
and target price of INR795 based on 15x CY15E EPS. This is in line with its historical mean
valuation (past five years peak multiple20x).

Table 1: Peer comparison

Note: *NRB and Global players estimates are as per bloomberg

Chart 6: One-year forward P/E

Companies Currency Mcap
(INR bn) CY13/FY14E CY14/FY15E CY15/FY16E CY13/FY14E CY14/FY15E CY15/FY16E CY13/FY14E CY14/FY15E CY15/FY16E
Domestic Players
SKF INR 33.5 (7.8) 22.7 29.9 19.1 15.6 12.0 14.3 15.7 17.9
FAG INR 25.9 (23.5) 30.6 31.9 21.3 16.3 12.3 12.8 13.8 14.9
NRB* INR 4.8 (17.9) 37.5 20.0 9.0 6.5 5.5 21.9 17.9 22.0
Global Players*
Ti mken USD 361 (33.7) 19.4 22.0 19.3 16.2 13.3 14.1 21.4 27.7
SKF AB SEK 689 (24.4) 47.8 17.8 20.6 13.9 11.8 4.4 24.8 25.9
NSK JPY 37829 112.4 35.5 12.8 18.2 13.4 11.9 10.9 12.1 11.9
ROE (%) P/E (x) Core EPS Growth (%)
0
180
360
540
720
900
F
e
b
-
0
4
A
u
g
-
0
4
F
e
b
-
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5
A
u
g
-
0
5
F
e
b
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6
A
u
g
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6
F
e
b
-
0
7
A
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7
F
e
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8
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8
F
e
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9
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F
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1
1
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-
1
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F
e
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A
u
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-
1
3
F
e
b
-
1
4
(
I
N
R
)
10x
12x
20x
17x
15x
Stock to trade at mid band of its
historic valuation at 15x CY15E
EPS on increasing capacity
utilisation in manufacturing
sales, strong uptick in trading
sales and earnings CAGR of 26%

Bearings
62

Key Risks

Delay in recovery in key segments
Slowdown in two-wheeler sales over and above the current slowdown in commercial
vehicles and cars can impact our sales growth projections since two-wheelers constitute
~58% of SKFs auto OEM revenues.

Rising competition from Japanese players
International players like NSK, Nachi and Koyo are setting up base in India. This will heighten
competition in the auto bearings industry over the long term.

Forex fluctuation
SKF buys 40% of traded goods from group company, SKF GmbH, Germany. As a result, INR
depreciation against EUR may negatively impact margin on these EUR-denominated
imports. Overall imports constitute 35% of net sales. This also includes currency headwinds
on ~20% of raw material costs (~5.5% of net sales) which are imported. Netting exports,
which are 6% of sales, SKFs net imports are at 29% of sales.

Reducing aftermarket
Better product quality, improved road infrastructure and prohibition on vehicle overloading
could gradually impact SKFs aftermarket revenue.

Royalty rate increase
Currently, royalty, trademark and service fees as a percentage of overall sales are 2% and
4%, respectively, as a percentage of manufactured sales. Any increase in the same could
pose a risk.

Delay in ramping up Ahmedabad facility
Execution delay in ramping up SKF Technologies Ahmedabad plant could impact our growth
as well as earnings estimates.

63

SKF India
Company Description

Fig. 6: Evolution of SKF India

Source: Company

2006
SKF India received
Dun & Bradstreet
American Express
Corporate Award
for the Top Indian
Company in the
Bearings Sector.
1965
Production
began in the
first factory
at
Chinchwad,
Pune
1989
Launched a
state-of- the
art factory
for SDGBB in
Bangalore
1997
Began world class
up-gradation of
Pune plant with
an investment of
INR1300mn;
several channels
of deep grove ball
bearings (DGBB)
and taper
roller bearings
(TRB) were
upgraded

2002
Established the
SKF Center for
learning
2004
SKF Application
Development
Center was
inaugurated

1923
Began
trading
operations
in Calcutta
1961
'Associated
Bearing
Company.'
was
incorporated
1987
Name of company
changed to SKF
Bearing India;
At its new
manufacturing
unit at
Bommasandra,
company has a
technical
collaboration with
Akteibolaget SKF
1999
SKF Bearings India
signed an
agreement with
Telco to supply hub
bearings for its
latest model Tata
Indica; SKF Bearings
launched an
electronic machine
reliability
inspection system
called `Marlin',
which can monitor
the condition of
bearings in
industrial
processes.
2010
SKF inaugurated a
new factory in
Haridwar to service
the two-wheeler and
replacement
market; Solution
factory at Pune to
offer value-added
solutions to our
customers; sourcing
domestically large
industrial bearings
for industrial
business

2012
SKF launches the
SKF low friction hub
Bearing Unit, an
energy efficient
wheel end for cars;
installation of two
new product
channels in Pune

1995
Company started
exports to US,
Italy, France and
Germany
2011
Two new bearing
channels at the
Bengaluru plant

Bearings
64

SKF India

SKF is part of Swedens AB SKF Group, a leading global supplier of bearings with revenue of
~EUR7bn (as of CY12). In India, the companys business spans across rolling bearings, seals,
mechatronics, services and lubrication systems. Within bearings, the company caters to
automobile OEM bearings, automobile aftermarket bearings, industrial OEM bearings,
industrial aftermarket bearings and exports. It has a well-diversified client base with no
client contributing more than 5% to revenue. SKF has a technology licence agreement with
parent AB SKF and pays royalty, trademark and service fees as a percentage of overall sales
at 2% and 4% as a percentage of manufactured sales.

While automotive bearings are manufactured, industrial bearings are majorly imported.
Traded (industrial) goods contribute 43% to overall revenue, which are majorly imported
from overseas AB SKF group companies, a small part (less than 10%) is procured locally from
SKF Technologies (unlisted entity owned by AB SKF). This helps SKF have a variable cost
structure and asset-light business model. The company also exports to AB SKF group
companies, which constitutes 6% of sales.

In the automotive segment, the company caters to PVs, two-wheelers, CVs and tractors. SKF
derives 45% of its revenue from automotives, of which ~70% comes from OEMs and 30%
from replacement. In automotive OEMs, the company caters to almost all the big OEMs like
Tata Motors, Maruti, Mahindra & Mahindra, Hero, Bajaj, Toyota, Honda, Yamaha, Ford and
Bosch, among others. Balance 49% of revenue comes from industrial sales, which are traded
and the company earns distributor margins. Within industrial segment, OEMs contribute
~33% and 67% comes from replacement. In the industrial segment, SKF caters to almost all
industries like agriculture, mining, steel, construction, food & beverages, home appliances,
pulp & paper, solar and wind energy, fans, pumps, gearboxes etc. Its clientele includes Coal
India, Tata Steel, Lafarge, NTPC, Cummins, Suzlon, BHEL, GE, ABB, ONGC, ABB, ITC and
Unilever, among others.

SKFs plants are located at Pune, Bengaluru and Haridwar with installed capacity in excess of
180mn units as on CY11 and running at ~60-65% utilisation. In terms of reach, the company
has pan-India presence with 300 distributors and 20,000 plus retailers. In India, last year, 60
new distributors and 2,000 new retailers joined SKF and a new kit centre was set up in Pune
in September 2012 to improve support for the Indian market.

The company also has a fellow subsidiary SKF Technologies which is a wholly owned
subsidiary of AB SKF, Sweden. While SKF addresses opportunities in the Indian bearings
market, SKF Technologies was set up to cater to global demand for industrial bearings in the
renewal energy segment. The latter derives more than 60% of revenue from exports and
domestic sales are routed via SKF. This entity now caters to off highway, earth moving,
defence equipments, etc. Having begun operations in March 2010, this entity reported
revenue and losses of INR1.9bn and INR520mn, respectively, in CY12. These losses may
continue on account of delays in capacity ramp up and long homologation periods (~3 years)
for industrial bearings.

SKF is the No. 1 player in the
Indian bearings market with
~28% market share and 45%
share of ball bearings segment

65

SKF India
Chart 7: Business mix as on CY12: Highly diversified

Chart 2: Segment wise applications

Chart 8: Sales growth of manufactured and traded bearings

Auto OEM -
4W
13%
Auto OEM -
2W
18%
Auto
aftermarket
14%
Industrial
OEM
16%
Industrial
aftermarket
33%
Exports
6%
Segment Product
Automotive 4 wheelers Wheel hub beari ng uni ts
Taper rol l er beari ngs
Smal l deep grove bal l beari ngs
Seal s
Repai r kits
Automotive 2 wheelers Deep grove bal l beari ngs
Seal s
Industrial Spheri cal and cyl i ndri cal rol l er beari ngs
Angul ar contact beari ngs
Industrial aftermarket Servi ce sol uti ons
Preventi ve mai ntenance, condi ti on moni tori ng,
deci si on support system and performance based
contracts
(14.0)
(2.6)
8.8
20.2
31.6
43.0
5,500
8,000
10,500
13,000
15,500
18,000
(
%
)
(
I
N
R

m
n
)
Manufactured bearings Traded bearings % growth % growth
Manufactu
red
52%
Traded
45%
Others
3%

Bearings
66

SKF AB (Global)

Swedens SKF Group, established in 1907, is a leading global supplier of bearings with
revenue of EUR7bn (as of CY12), 20% market share in ball bearings and 11.4% operating
margin. Its fundamental strength is the ability to continuously develop new technologies
and create products that offer competitive advantage to customers. This is based on
experience in over 40 industries with knowledge across SKF technology platformsbearings
& units, seals, mechatronics, services and lubrication systems. The group does business
primarily through its three business areasSKF Industrial Market, Strategic Industries; SKF
Industrial Market, Regional Sales and Service and SKF Automotive.

All divisions use the full range of SKFs technical platforms, but target diverse customer
segments. While the industrial division serves a wide range of OEM customers, the service
division serves industrial aftermarket and uses both hardware and software to improve
plant efficiency and also provides maintenance, consulting and monitoring.

SKF AB has around 140 manufacturing sites in 28 countries and is represented in over 130
countries through its own sales companies, over 15,000 distributor locations and 46,000
employees. The groups investment in R&D has resulted in numerous innovations, forming
bases for new standards, products and solutions in the bearing industry and also in other
platforms e.g., preventive maintenance and automated lubrication systems. In 2012, SKF AB
recorded 663 (620) invention disclosures and successfully applied for 421 (325) first filing
patent applications, increasing the number of first time patents by 30%. The groups R&D
expenditure was USD237 in CY12, corresponding to 2.5% of its annual sales and grew by
10% YoY.

Chart 9: CY12: Sales breakup by region

Source: SKF Global

Europe is SKFs major market contributing 44% to the groups revenue, followed by APAC at
27% and North America and Latin America at 22% and 8% respectively. Markets outside of
Western Europe and North America contribute 43% to revenues, up from 22% in 2000.

North America
22%
Latin America
8%
Western Europe
35%
Sweden
3%
Eastern Europe
5%
Middle East and
Africa
3%
Asia/Pacific
24%
SKF AB (Sweden) is the leading
global supplier in bearings
industry with revenues of
EUR7bn (as of CY12), 20% market
share and strong 11.4%
operating margin

67

SKF India
Chart 10: CY12: Sales break up by business divisions

Source: SKF Global

The automotive division provides bearings and seals to manufacturers of trucks, buses, cars
and two wheelers, as well as home appliances, electric motors and power tools. Repairs and
services are provided through SKFs vehicle service market. SKF Industrial, regional sales
(IMRSS) caters to metals, pulp & paper, mining & cement, food & beverage and marine
segments. SKF Industrial, Strategic Industries (IMSI) caters to Aerospace, renewable energy,
traditional energy, industrial drives, precision, railway and off-highway and lubrication
segments. The higher margin IMSI and IMRSS generate over 70% of total revenue compared
to 57% in 2000 (previously named Industrial and Service).

Chart 12: InnovationA key success factor

Source: SKF Global

SKF has set the following financial targets at the group level: over a longer term
15% operating margin.
8% annual sales growth in local currencies.
27% RoCE.
SKF Industrial
Market,
Strategic
Industries
29%
SKF Industrial
Market,
Regional Sales
and Service
41%
SKF Automotive
30%
100
170
240
310
380
450
2006 2007 2008 2009 2010 2011 2012
(
N
o
s
.
)
Patents - number of first filings

Bearings
68

Financial Outlook

Automotive revenue to post 19% CAGR over CY13-15E
With sizeable exposure to two wheelers (~58% of auto OEM bearings revenue), we expect
SKF to register 14% CAGR in two wheeler OEM over CY13-15E riding improving rural
demand and aggressive product launches by OEMs. Over the next 12-18 months, ~15 new
product launches are anticipated across two wheeler OEMs. As a result, SKFs auto OEM
bearings (31% of overall sales) segment is estimated to post 15% revenue CAGR over CY13-
15E.

Post a life of about four-five years, bearings need replacement. SKF derives ~31% of
automotive revenue from the auto after-market segment (14% of overall sales). With past
OEM cycle driving sales, we expect 28% CAGR in auto replacement sales over CY13-15E.
Also, a formidable distribution network of more than 300 distributors and 20,000 retailers
and preference for organised players will drive this segments sales. Hence, we expect SKFs
auto bearings (OEM + replacement) segment to post 19% revenue CAGR over CY13-15E.

Chart 12: Auto bearings on an uptick


(6.0)
2.6
11.2
19.8
28.4
37.0
5,000
7,200
9,400
11,600
13,800
16,000
(
%
)
(
I
N
R

m
n
)
Manufactured domestic auto sales % growth
Strong exposure to two-wheelers
at 58% of OEM revenues to drive
robust automotive sales of 19%
sales CAGR over CY13-15E

69

SKF India
Chart 13: Two-wheeler industry trending up on strong rural demand


Table 3: New product launches by two-wheeler OEMs over next 1-2 years


Table 4: Capex plans of players


Increased localisation to drive 19% CAGR in trading sales
The industrial bearings segment is expected to surge in H2CY14 with expected revival in the
manufacturing sector (IIP) in CY14. SKF derives ~49% of revenue from the industrial sector.
Based on increased localisation in industrial bearings we expect growth of 16% and 23% in
traded sales in CY14 and CY15, respectively, post a decline (-8%) in CY13E.

We also expect improvement in key segments such as railways, power and mining sectors to
drive demand for industrial bearings. Within key segments, the wind energy sector is yet to
(18.8)
(9.4)
0.0
9.4
18.8
28.2
0
4
8
12
16
20
F
Y
0
2
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
E
F
Y
1
5
E
F
Y
1
6
E
(
%
)
(
m
n
)
2W % YoY
Company Segment Model Timeline
Hero MotoCorp Scooter Dash FY15
Scooter Dare FY15
Scooter Zi r FY16
Motorcycl e New vari ants/refreshes FY14-15
HMSI Motorcycl e 100-125cc commuter bi ke FY14
Motorcycl e CBR300 FY15
Scooter Acti va FY15
Bajaj Auto Motorcycl e 100-125 cc commuter bi ke FY14 end
Bajaj-KTM Motorcycl e Pul sar 400 FY15
Motorcycl e RC Seri es FY15/16
Suzuki Motorcycl e Inazuma- GV250. FY15
Indi a Yamaha Motors Scooter Al pha FY15
TVS Motors Scooter Wego Based FY14
Motorcycl e New Vi ctor FY15
Capex (INR mn) FY12 FY13 FY14E FY15E
Hero Motors 6,835 4,001 8,000 8,000
Bajaj Auto 3,000 3,000 3,000 3,000
Better rural demand and
aggressive product launches to
drive OEM demand in 2W, a key
segment for SKF

.

Bearings
70

attract investments despite introduction of generation-based incentives due to
apprehensions on disbursal of incentives given the weak government finances. However,
increased sourcing from SKF Technologies plant for other industrial end markets is likely to
drive market share gains. Sourcing from SKF Technologies, which is currently less than 10%
for SKF India, is likely to increase to 20% over the next two to three years which should drive
strong growth over the same period.

The key to highlight is that the company majorly imports industrial bearings and partially
sources them from SKF Technologies. As the latter ramps up manufacturing of industrial
bearings, the benefits of domestic sourcing would be significant. We expect SKF group to
pass on some of the benefits to customers to gain market share. Consequently, we have
estimated 19% CAGR in trading sales over CY13-15E versus 9% CAGR in past five years.

Chart 14: Strong uptick expected in traded sales over CY13-15E


Uptick in auto industry to help maintain gross margin
SKFs overall gross margin is 36%manufacturing margin ~50% and traded margin ~17%.
The latter suppresses the overall margin as in the traded business the company earns only
distribution margin. Traded goods, which contribute 43% to overall sales, are mostly
imported from SKF ABs group companies, while less than 10% is procured locally from SKF
Technologies. While ongoing localisation will lead to strong sales growth in traded sales, an
uptick in auto industry will lead to increase in manufacturing sales. Hence, we expect overall
gross margin to sustain at ~35.7% in CY15E versus 36% in CY13E.

(14.0)
(2.6)
8.8
20.2
31.6
43.0
5,500
7,500
9,500
11,500
13,500
15,500
(
%
)
(
I
N
R

m
n
)
Traded bearings % growth
Capacity uptick ahead of peers in
industrial division to drive
trading sales at 19% CAGR versus
17% CAGR in manufacturing sales
over CY13-15E

71

SKF India
Chart 15: Gross margin to sustain at ~36%


OPMs to improve led by increasing capacity utilisation
SKF has generated an average EBITDA margin of 11.6% in past five years. With uptick in
manufactured sales and better operating leverage, we expect EBITDA margin to surge
100bps over CY13-15E to 12.2%.

Chart 16: Operating margin to improve


Higher capacity utilisation, lower capex to boost cash flow
SKFs balance sheet is cash rich with no debt as on June 2013. The company incurred
significant capex (INR2.4bn) over the past three years, with an average run rate of
INR770mn per year. This is expected to taper to INR1.6bn over CY13-15E, an average run
rate of INR500-600mn per year, which will be internally funded and drive positive operating
and free cash flow.

Having undertaken major capacity expansion to 180mn in CY11 from 132mn in CY09the
current capacity utilisation stands at 60-65% compared to 75% and 80% over the past three
32.9
33.6
34.3
35.0
35.7
36.4
(
%
)
7.0
9.6
12.2
14.8
17.4
20.0
(
%
)
With a capacity utilisation of
~65%, company well placed for
OPM uptick led by increased
utilisation

Bearings
72

and five years, respectively. Hence, increasing capacity utilisation and downward capex
trajectory will boost operating cash flows.

Chart 17: Capex on a downtrend


Abundant cash flow
SKF was carrying cash of INR5.5bn (including the loan given to SKF Technologies of INR2.45
bn) making it INR105/share as on CY12, which is 16% of current market cap. This is including
for the loans given to the group (associate) company. It incurred significant capex
(INR2.4bn) over the past three years, which is expected to taper to INR1.6bn over CY13-15E,
driving positive operating and free cash flow. SKF has been generating strong operating cash
flows over the yearsCY08-12 cumulative free cash flow stood at INR1.46bn. However, this
includes an impact of ~INR2.4bn inter corporate loan extended to SKF Technologies.
Excluding this, free cash flow stood at ~INR3.86bn. Working capital has been low. Moreover,
SKF Technologies will pay first tranche of INR250mn towards loan repayment in CY14, which
will be completed over five years.

Hence, SKFs free cash flow is estimated at INR5.15bn over the next three years (versus
INR3.86bn in past five years). We expect the companys net cash to stand augmented by
1.88x over CY12-15E to INR197/share in CY15E (31% of current market cap). We expect net
cash per share at INR121 (19% of current market cap), INR156 (25% of current market cap)
and INR197 (31% of current market cap) for CY13E, CY14E and CY15E, respectively, from
INR105per share in CY12 (17% of current market cap).

Improving asset turnover to bolster core return ratios
Historically, SKF has generated core fixed asset turnover ratio of 1.5x and an average EBIT
margin of 10.6%; this dropped to 1.3x and 9.6%, respectively, in CY13. Going forward, with
improving average asset turn and EBIT margin to 1.5x plus and 10.7%, respectively, we
expect RoE and core RoCE to rebound from 14.3% and 31.4% in CY13E to 17.9% and 52.4%
in CY15E, respectively.

275
452
629
807
984
1,161
(
I
N
R

m
n
)
On strong free cash flow we expect
net cash per share to stand
augmented by 1.88x to
INR197/share in CY15E (31% of
current market cap)

73

SKF India
Chart 18: Higher core fixed asset turns


Chart 19: RoE and RoCE (%) To trend up with better asset turn


0.0 0.5 1.0 1.5 2.0
CY10
CY11
CY12
CY13E
CY14E
CY15E
(x)
11.0
21.6
32.2
42.8
53.4
64.0
(
%
)
Core RoCE RoE

Bearings
74


Key assumptions
Macro
GDP(Y-o-Y %) 5.0 4.8 5.4 6.3
Inflation (Avg) 7.4 6.2 5.5 6.0
Repo rate (exit rate) 7.5 8.0 7.5 7.0
USD/INR (Avg) 54.5 62.0 60.0 58.0
Industry growth assumptions (%)
Auto OEM (2W) volume growth 2.1 6.0 8.0 10.0
Auto OEM (PV) volume growth 2.7 (5.5) 6.0 12.0
Auto CV industry volume growth (10.5) (19.0) 11.0 23.0
Company growth assumptions (%)
Manufactured sales (%)
Auto 2W OEM volume growth 2.1 7.0 9.0 11.0
Auto PV OEM volume growth (5.5) 6.0 12.0
Auto CV OEM volume growth (10.5) (19.0) 11.0 23.0
Auto aftermarket sales growth (4.7) 16.3 30.8 24.7
Industrial sales growth (6.5) (7.0) 13.0 18.0
Export revenue growth (35.6) 5.0 5.0 5.0
Traded sales (%)
Industrial sales growth (11.6) (7.9) 16.0 23.0
Revenue mix (% of gross sales)
Manufactured 56.9 59.7 59.7 58.7
Traded 43.1 40.3 40.3 41.3
Gross margin
Manufacturing gross margin (%) 49.7 50.5 50.5 50.5
Traded gross margin (%) 17.1 18.5 18.5 18.5
Cost assumptions
Raw mat. cost as % net sales 64.7 64.0 64.0 64.3
Employee cost as % of net sales 7.6 7.7 7.6 7.2
Administrative exp as % of net sales 16.1 17.0 16.8 16.0
Net revenues 22,276 22,268 25,807 31,000
Gross profit 7,861 8,027 9,298 11,068
Employee expenses 1,694 1,724 1,976 2,261
Other expenses 3,583 3,804 4,365 5,019
EBITDA 2,584 2,499 2,958 3,788
EBIT 2,148 2,048 2,495 3,303
Other income 683 567 715 868
Profit before tax 2,831 2,615 3,210 4,171
Provision for tax 931 863 1,059 1,376
Core profit 1,901 1,752 2,151 2,795
Extraordinary/ Prior period items - (155) - -
Profit after tax 1,901 1,598 2,151 2,795
Core EPS (INR) basic 36.0 33.2 40.8 53.0
EPS (INR) diluted 36.0 30.3 40.8 53.0
CEPS 27.8 24.7 32.0 43.8
DPS 7.5 6.7 8.3 11.0
Dividend payout (%) 20.8 20.2 20.2 20.8
Gross margin 35.3 36.0 36.0 35.7
EBITDA margins 11.6 11.2 11.5 12.2
EBIT margin 9.6 9.2 9.7 10.7
Interest 0.0 0.0 0.0 0.0
Growth metrics (%)
Revenues (8.5) (0.0) 15.9 20.1
EBITDA (13.3) (3.3) 18.4 28.1
PBT (9.6) (7.6) 22.7 29.9
Core Net profit (8.5) (7.8) 22.7 29.9
Core EPS (8.5) (7.8) 22.7 29.9

75

SKF India

As on 31st December CY12 CY13E CY14E CY15E
Deferred tax liability/asset 84 - - -
Sources of funds 11,637 12,893 14,534 16,650
Tangible assets 3,480 3,629 3,666 3,681
Intangible assets 1 1 1 1
CWIP (incl. intangible) 591 591 591 591
Cash and cash equivalents 3,070 3,787 5,735 8,047
Inventories 2,486 2,630 2,780 3,245
Sundry debtors 3,196 3,442 3,547 3,963
Loans and advances 3,134 3,134 2,884 2,634
Trade payable 2,679 2,983 3,201 3,794
Other current liabilities & prov. 1,684 1,381 1,511 1,760
Total current liabilities & prov. 4,363 4,364 4,713 5,553
Net profit 1,901 1,752 2,151 2,795
Add: Int & other non-cash items (460) (271) (371) (360)
Gross cash flow 1,877 1,932 2,243 2,920
Less: Changes in working cap. (112) 389 (94) 39
Less: Capex 807 600 500 500
Free cash flow 1,182 943 1,836 2,381
1,182 937 1,830 2,372
Cash flow metrics
Financing cash flow (460) (413) (509) (679)
Investing cash flow (1,011) (600) (250) (250)
Net cash flow 519 529 1,577 1,952
Capex (807) (600) (500) (500)
Dividends paid (460) (413) (509) (679)
Peer comparison valuation
Companies Mcap
(INR bn) CY13 CY14E CY15E CY13 CY14E CY15E CY13 CY14E CY15E CY13 CY14E CY15E
SKF 33.5 19.1 15.6 12.0 14.3 15.7 17.9 31.5 38.3 52.4 18 35 45
FAG 25.9 21.3 16.3 12.3 12.8 13.8 14.9 21.8 26.8 34.8 85 116 154
FCF/Share P/E (x) ROE (%) Core ROCE (%)
Core ROACE (%) 35.2 31.5 38.3 52.4
ROAE (%) 17.5 14.3 15.7 17.9
ROA (%) 17.5 14.3 15.7 17.9
Quick ratio 1.5 1.5 1.4 1.2
Cash ratio 0.7 0.9 1.2 1.4
Diluted EPS (INR) 36.0 30.3 40.8 53.0
Y-o-Y growth (%) (8.5) (15.9) 34.6 29.9
CEPS (INR) 27.8 24.7 32.0 43.8
Diluted P/E (x) 17.6 20.9 15.6 12.0
P/BV (x) 2.9 2.6 2.3 2.0
EV/Sales (x) 1.2 1.2 1.0 0.7
EV/EBITDA (x) 10.5 10.6 8.4 6.0
Dividend yield(%) 1.2 1.1 1.3 1.7

Bearings
76


Holding Top -10
Perc. Holding Perc. Holding
Ruanne Cunniff & Goldfarb Inc A/c 5.72 Reliance Capital Trustee Co Ltd A/c Reliance Vision Fund 1.15
Carnegie Fonder AB A/c Carnegie Strategifond 3.32 Stichting Pensioenfonds ABP 1.06
UTI Master Share Unit Scheme 2.08 HDFC Trustee Company Ltd HDFC Equity Fund 1.83
SBI Magnum Taxgain Scheme 2.09 HDFC Trustee Company Ltd A/c HDFC Mid capopportunities Fund 1.50
New India Assurance Company Ltd 1.22
Bulk Deals
Date Acquirer / Seller B/S Qty Traded Price
5-Jul-12 ACACIA PARTNERS L.P S 370,600 626
5-Jul-12 ACACIA BANYAN PARTNERS P 370,600 626
Insider Trades
Reporting Date Acquirer / Seller B/S Qty Traded
21-Jan-14 HDFC Mid-Cap Opportunities Fund Buy 50,000
21-Jan-14 HDFC Prudence Fund Buy 68,000
13-Dec-13 Ruane Cunniff & Goldfarb Inc A/c ACACIA II Partners LP & Oth Sell 210,000
8-Mar-11 Ruanne Cunniff & Goldfarb Inc. & PACs Buy 153,000
Additional Data
Directors Data
Kamlesh C Mehra Chairman Pradeep Bhandari Company Secretary
Henrik Lange Director Shishir Joshipura Managing Director & CEO
Darius C Shroff Director Prasad R Menon Director
Tryggve Sthen Director David Bishop Alternate Director
Rakesh Makhija Director Prakash M Telang Alternate Director
Vartan Vartanian Director

Auditors - BSR & Associates



NRB Bearings (NRB), the fifth largest organised bearings player in India
with ~7% revenue market share, is a dominant player (70% market share)
in niche needle roller bearings. Given specialised application of needle
bearings (50% of NRBs revenues) and small market size, competitive
intensity is low with INA (a Schaeffler Group company) being the other
major competitor. Company manufactures customised bearings for
leading domestic and global auto companies. Domestic OEMs and
exports continue to be key growth drivers. The stock is Not Rated.

OEMs: Major revenue contributor
OEMs account for a major 65% of NRBs revenues as the company is equipped with
indigenous engineering capabilities. Within OEMs, ~70% of the companys supplies are
to two-wheelers, three-wheelers and commercial vehicles. The aftermarket business
constitutes 14% of its sales. Some of its key customers include Hero MotoCorp, Bajaj
Auto, Maruti Suzuki and Renault Volvo. It works with many OEMs, directly and
indirectly, from the conceptualisation stage to providing anti-friction solutions.

Exports: A strong driver
NRB exports to global OEMs such as Renault Volvo, Daimler Trucks, Volvo and Ingersoll
Rand, which has enabled it to combat current slowdown in the domestic automobile
industry. Exports constituted 21.7% of NRBs total revenues in FY13 having increased
from 10% in FY11; exports logged 66.3% CAGR during the period.

Capital requirement high
The company manufactures and processes in-house which entails high capital
requirements for funding growth. This helps generate better EBITDA margin, but leads
to lower asset turnover. Company incurred capex of INR2bn over the past two years
and hence its D/E is at a high 1.4x.

Valuations
Going forward, revenues to track recovery in the domestic auto market coupled with
growth in exports. The stock is trading at 7.39x trailing EPS.

COMPANY PROFILE
NRB BEARINGS
Needle sharp
EDELWEISS RATINGS
Absolute Rating NOT RATED
Investment Characteristics NA

MARKET DATA (R: NBEA.BO, B: NRBBR IN)
CMP : INR 37
Target Price : NA
52-week range (INR) : 46 / 26

Promoters *

62.5 62.8 62.8
MF's, FI's & BKs
1.2 1.2 1.2
FII's 19.0 19.0 18.7
Others 17.3 17.0 17.3
: NIL


Sensex Stock
Stock over
Sensex
1 month (2.7) (14.5) (11.8)
3 months (1.2) 5.0 6.2
12 months 5.1 8.8 3.7

Shradha Sheth
+91 22 6623 3308

Manoj Bahety, CFA
+91 22 6623 3362

February 19, 2014

Financials
Year to March FY10 FY11 FY12 FY13
EBITDA (INR mn) 565 1,092 1,144 1,008
Core profit (INR mn) 217 547 509 480
Diluted shares (mn) 48 97 97 97
EPS (INR) 25.2 27.8 24.9 4.8
P/E (x) 1.4 1.3 1.4 7.5
EV/EBITDA (x) 4.3 3.9 4.6 5.9
ROAE (%) 12.7 28.5 23.1 22.3

Bearings
78


Net revenues 3,427 4,930 5,764 6,080
Gross profit 2,270 3,251 3,706 3,799
Employee expenses 660 853 950 1,020
Other expenses 1,045 1,306 1,613 1,772
EBITDA 565 1,092 1,144 1,008
EBIT 359 851 851 687
Other income 92 35 36 102
Profit before tax 345 816 734 582
Core profit 217 547 509 480
Extraordinary/ Prior period items (13) 0 - (4)
Profit after tax 205 548 509 477
Minority Interest (after tax) 0 12 10 9
Net Profit after Minority Interest 205 536 499 468
Equity shares outstanding (mn) 48 97 97 97
EPS (INR) basic 25.2 27.8 24.9 4.8
EPS (INR) diluted 25.2 27.8 24.9 4.8
CEPS 5.0 16.0 10.6 8.8
DPS 1.0 2.0 2.0 1.7
Dividend payout (%) 4.0 7.2 8.0 35.2
Gross margin 66.2 65.9 64.3 62.5
EBITDA margins 16.5 22.1 19.8 16.6
EBIT margin 10.5 17.3 14.8 11.3
Interest 3.1 1.4 2.7 3.4
Growth metrics (%)
Revenues 12.2 43.9 16.9 5.5
EBITDA 68.6 93.2 4.8 (11.9)
PBT 311.7 136.1 (10.0) (20.7)
Net profit 641.6 151.9 (7.0) (5.6)
EPS 472.5 10.4 (10.4) (80.6)

As on 31st March FY10 FY11 FY12 FY13
Minority interest (14) (2) 9 17
Long term borrowings 353 650 1,830 1,871
Short term borrowings 590 490 746 853
Loan funds 943 1,140 2,575 2,723
Deferred tax liability/asset 128 116 119 102
Sources of funds 2,821 3,325 5,040 4,822
Tangible assets 1,676 1,846 2,315 2,186
Cash and cash equivalents 55 91 558 33
Inventories 866 1,124 1,378 1,475
Sundry debtors 746 1,025 1,256 1,515
Loans and advances 200 254 209 274
Other assets - 178 379 296
Trade payable 453 609 640 670
Other current liab. & prov. 284 613 618 480
Total current liab. & prov. 737 1,223 1,258 1,151
Net profit 205 536 499 468
Add: Int & other non-cash items* 597 (770) (651) (967)
Gross cash flow 1,008 6 141 (178)
Less: Changes in working cap. 249 (401) (405) (522)
Operating cash flow 759 406 546 344
Less: Capex* (116) (358) (1,134) (936)
Free cash flow 875 764 1,680 1,280

79

NRB Bearings

ROACE (%) 20.0 75.0 54.4 34.0
ROAE (%) 12.7 28.5 23.1 22.3
ROA (%) 7.2 17.8 12.2 9.7
Quick ratio 1.3 1.2 1.5 1.8
Cash ratio 0.1 0.1 0.4 0.0
Payables (days) 123 115 111 105
Diluted EPS (INR) 25.2 27.8 24.9 4.8
Y-o-Y growth (%) 472.5 10.4 (10.4) (80.6)
CEPS (INR) 5.0 16.0 10.6 8.8
Diluted P/E (x) 1.4 1.3 1.4 7.5
P/BV (x) 1.0 1.7 1.5 1.8
EV/Sales (x) 0.7 0.9 0.9 1.0
EV/EBITDA (x) 4.3 3.9 4.6 5.9
Dividend yield(%) 2.8 5.6 5.6 4.7

Miscellaneous
80


THIS PAGE IS INTENTIONALLY LEFT BLANK



Timken India (Timken), the fourth largest organised bearings player in
India with overall revenue market share of ~8%, is a leading
manufacturer of tapered roller bearings with ~45% market share. In
terms of reach, the company has pan-India presence with ~87
distributors. Domestic CV growth and exports continue to be key growth
drivers. The stock is Not Rated.

OEMs: Major revenue contributor
Strong global parentage has enabled Timken to supply to the OEMs and aftermarkets.
Domestic sales constitute 74% of its sales. Some of its key customers in automotives
include Indian Railways, New Holland Agriculture, FIAT, Escorts, Titagarh and Texmaco.
In the industrial segment, its key customers are BHEL, Tata Steel and JSW Steel.

Exports: A strong driver
Exports constituted 26% of Timkens FY13 revenues, which enabled it to combat
slowdown in the domestic automobile industry. Exports logged 32% CAGR during
FY10-13.

Traded sales leads to asset-light model
Timkens key raw materials are semi-finished components, and the company does the
finishing process at its facility. Company also has traded revenues (25% contribution)
which are majorly imported from the parent. As a result, the business model is asset-
light and cost structure is variable. However, core fixed asset turnover ratio (excluding
traded revenues) stood at 1.7xin FY13.

Valuations
Going forward, revenues are expected to track the recovery in the domestic auto
market (CVs) coupled with growth in exports. The stock trades at 24x trailing EPS.
COMPANY PROFILE
TIMKEN INDIA
Taper roller champ
EDELWEISS RATINGS
Absolute Rating NOT RATED
Investment Characteristics NA

MARKET DATA (R: TIMK.BO, B: TMKN IN)
CMP : INR 166
Target Price : NA
52-week range (INR) : 180 / 128

Promoters *

75.0 75.0 75.0
MF's, FI's & BKs
3.8 3.8 4.3
FII's 6.1 6.1 4.7
Others 15.1 15.1 16.0
: NIL


Sensex Stock
Stock over
Sensex
1 month (2.7) 1.7 4.4
3 months (1.2) (7.4) (6.2)
12 months 5.1 (0.2) (5.2)

Shradha Sheth
+91 22 6623 3308

Manoj Bahety, CFA
+91 22 6623 3362

February 19, 2014

Financials
Year to March CY09 CY10 FY12 FY13
EBITDA (INR mn) 412 660 1,063 735
Core profit (INR mn) 326 522 807 442
Diluted shares (mn) 64 64 64 64
EPS (INR) 5.1 8.2 12.7 6.9
P/E (x) 31.7 19.8 12.8 23.3
EV/EBITDA (x) 24.2 15.2 8.9 14.0
ROAE (%) 10.4 14.7 18.6 13.5

Bearings
82


Income statement (INR m)
Net revenues 3,179 4,579 8,262 6,882
Gross profit 1,564 2,215 3,497 2,711
Employee expenses 319 451 613 523
Other expenses 833 1,104 1,821 1,454
EBITDA 412 660 1,063 735
EBIT 309 548 914 595
Other income 145 190 203 55
Profit before tax 449 730 1,106 637
Core profit 326 522 807 442
Extraordinary/ Prior period items (0) (11) - -
Profit after tax 325 511 807 442
EPS (INR) basic 5.1 8.2 12.7 6.9
EPS (INR) diluted 5.1 8.2 12.7 6.9
CEPS 3.5 6.4 10.3 4.8
DPS - - 20.0 2.0
Dividend payout (%) - - 158.0 28.8
Gross margin 49.2 48.4 42.3 39.4
EBITDA margins 13.0 14.4 12.9 10.7
EBIT margin 9.7 12.0 11.1 8.7
Interest 0.1 0.2 0.1 0.2
Growth metrics (%)
Revenues (21.4) 44.0 44.3 4.1
EBITDA (37.7) 60.3 28.8 (13.6)
PBT (42.0) 62.4 21.2 (27.9)
Net profit (38.2) 60.4 23.6 (31.4)
EPS (38.2) 60.4 23.6 (31.4)

Balance sheet (INR m)
As on 31st March CY09 CY10 FY12 FY13
Deferred tax liability/asset (4) (37) (27) (44)
Sources of funds 3,291 3,769 3,264 3,384
Tangible assets 568 582 795 790
Intangible assets - - 2 1
Total net fixed assets 676 607 899 1,049
Non current investments - - 0 0
Current investments - - 659 318
Investments 1,691 2,103 659 319
Cash and cash equivalents 75 31 118 140
Inventories 673 1,053 1,476 1,403
Sundry debtors 507 823 1,094 1,294
Loans and advances 262 235 255 256
Trade payable 484 790 974 658
Other current liabilities & prov. 110 293 328 545
Total current liabilities & prov. 594 1,083 1,302 1,203
Net current assets (ex cash) 848 1,028 1,588 1,876
Free cash flow
Net profit 325 511 807 442
Add: Int & other non-cash items* (96) (81) (87) 12
Gross cash flow 332 542 869 594
Less: Changes in working cap. (252) 158 528 462
Operating cash flow 584 384 341 131
Less: Capex* 81 37 443 302
Free cash flow 503 347 (102) (170)

83

Timken India

ROACE (%) 18.7 34.7 35.5 22.0
ROAE (%) 10.4 14.7 18.6 13.5
ROA (%) 10.4 14.8 18.3 13.3
Quick ratio 1.3 1.0 1.1 1.4
Cash ratio 0.1 0.0 0.1 0.1
Diluted EPS (INR) 5.1 8.2 12.7 6.9
Y-o-Y growth (%) (38.2) 60.4 54.5 (45.1)
CEPS (INR) 3.5 6.4 10.3 4.8
Diluted P/E (x) 31.7 19.8 12.8 23.3
P/BV (x) 3.1 2.7 3.3 3.0
EV/Sales (x) 3.1 2.2 1.1 1.5
EV/EBITDA (x) 24.2 15.2 8.9 14.0
Dividend yield(%) - - 12.3 1.2

Miscellaneous
84


Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com
Vikas Khemani Head Institutional Equities vikas.khemani@edelweissfin.com +91 22 2286 4206
Nischal Maheshwari Co-Head Institutional Equities & Head Research nischal.maheshwari@edelweissfin.com +91 22 4063 5476
Nirav Sheth Head Sales nirav.sheth@edelweissfin.com +91 22 4040 7499
Coverage group(s) of stocks by primary analyst(s): Miscellaneous
AIA Engineering, Balkrishna Industries, VIP Industries

Distribution of Ratings / Market Cap
Edelweiss Research Coverage Universe

Rating Distribution* 122 47 14 184
* 1 stocks under review

Market Cap (INR) 118 54 12
> 50bn Between 10bn and 50 bn < 10bn
Date Company Title Price (INR) Recos

Buy Hold Reduce Total
Recent Research
04-Feb-14 Balkrishna
Industries
Improving volumes; strong
margins; Result Update
333 Buy
31-Jan-14 VIP
Industries
CSD turnaround, operating
margin uptick;
Result Update
61 Buy
28-Jan-14 AIA
Engineering
Strong operating margins;
Result Update
501 Buy

Rating Interpretation

Buy appreciate more than 15% over a 12-month period
Hold appreciate up to 15% over a 12-month period
Reduce depreciate more than 5% over a 12-month period
Rating Expected to

85

Timken India

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