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. OVERVIEW Research report: Indian Bearings Industry February 26 th , 2015 Bearings, also known

. OVERVIEW

Research report: Indian Bearings Industry

February 26 th , 2015

Bearings, also known as anti-friction components have their applications in automobiles, pumps, gearboxes, heavy earth-moving equipments and industrial sectors. The growth of the bearings industry, which caters mostly to the requirement of replacement market, is directly correlated with the automotive and industrial sectors. Though automotive sector in India accounts for the largest share in demand of bearings in the Indian market, Industrial bearings market is far more widespread. It is spread over every segment of the Industry. As every movement, rotating or linear requires support of bearings prearrangement, the applications and varieties of bearing products is enormous, which not only widens to a huge size range with variations, but calls for a special variety of products such as: Slewing Rings, Track Rollers, Rod Ends, Spherical Plain, Cam followers, Linear motion system, Re-circulating bearings, Ball bushings, Plain bearings and many more. Approximately, 70% bearings are used in industries other than automobiles. In India, Industrial Bearings are manufactured by few players mostly it is imported from Europe, Japan and other countries. As the infrastructure develops, the Bearing Industry has got the opportunity to grow up. The Indian bearing market accounts for less than 5% of the world bearing market. The players in that market include international manufacturers and numerous local manufacturers such as NEI, NRB, ABC and TATA. A noteworthy proportion of bearings are imported from countries like Germany, Japan, China, Singapore, Sweden, France and Italy.

Indian Bearings Industry Segregation

Consumption-wise Import, 40% Domestic, 60%
Consumption-wise
Import,
40%
Domestic,
60%
Industry-wise Automo tive, Industri 48% al, 52%
Industry-wise
Automo
tive,
Industri
48%
al, 52%
Segment-wise Afterma rkets, 35% OEM, 65%
Segment-wise
Afterma
rkets,
35%
OEM,
65%
Bifurcation on the basis of end use Types of bearings manufactured from roller and ball
Bifurcation on the basis of end use
Types of bearings manufactured from roller and ball bearings
Thrust, 3%
Needles,
9%
Spherical,
Tapered,
Ball, 48%
17%
42%
Roller,
52%
Cylindrical
, 29%
Research report: Indian Bearings Industry February 26 th , 2015 Bearings Industry – Overview The

Research report: Indian Bearings Industry

February 26 th , 2015

Bearings IndustryOverview

The current size of the bearings market in India inclusive of exports stands approximately ` 3tn. With the rapid industrialization, the Indian bearings industry has doubled in the last five years and has registered annual gains well above the global average of ~35%. With increased infrastructure and industrialization, at least, this trend should continue for next five years. India is among the fastest growing markets for bearings. The organized segment constituting global players as Timken, SKF and others should account for approximately ` 1tn. Close to 40% of the total demand is fulfilled through imports with the balance being met by indigenous products.

As the Indian infrastructure develops and the industry modernizes, we can see tremendous opportunities opening up for the bearings industry. In the near future, customers will look for better and cleaner technologies, hence necessitating aftermarket services including maintenance of equipment, reliability monitoring, remanufacturing so as to keep their equipment running efficiently and for long. The companies should be in excellent positions to provide their astute customers with the best in the industry value added solutions.

Moreover, the Indian economy which is driven largely by the domestic demand was not only spared of the worst of the downturn but also very well placed to make the most of the upturn. Most of the companies have used the downturn to make themselves lean and although it has been a somewhat painful process, the future looks more promising. While the Indian consumers maintained their spending even in the downturn, the capital investments were put on hold by many companies. This impacted the industrial segments. As the government increases its thrust on the infrastructure build, the economic growth will accelerate.

Indian Bearings Industry riding high on better growth prospects

Drivers Challenges
Drivers Challenges

Drivers

Drivers Challenges

Challenges

Drivers Challenges
economic growth will accelerate. Indian Bearings Industry riding high on better growth prospects Drivers Challenges
Research report: Indian Bearings Industry February 26 th , 2015 Demand Drivers-Indian bearings Industry Demand

Research report: Indian Bearings Industry

February 26 th , 2015

Demand Drivers-Indian bearings Industry

Demand arising out of the bearings industry can be bifurcated in two categories catering to two different markets, viz, ‘OEM market’ and ‘replacement market’. The OEM market for bearing represents the demand arising out of the original vehicle and industrial manufacturers. This market is characterized by requirements of high quality, stringent delivery norms and lower margins. Replacement Demand is the after-sale demand where as a part of the maintenance bearings suffering premature failures due to wear and tear or manufacturing defects need replacement The replacement market characterizes the demand arising on account of replacing the used and worn-out bearings. The size of replacement market is reliant on equipment density and frequency of maintenance. Replacement market accounts for 40% of total demand for the bearing industry. The margins in this market are relatively higher placed as compared to the OEM market.

Indian bearings industry is an oligopolistic market

Global Bearing Industry (estimated at `3 tn)

market Global Bearing Industry (estimated at ` 3 tn) Industrial segment ( ` 1.3 tn) Automotive
market Global Bearing Industry (estimated at ` 3 tn) Industrial segment ( ` 1.3 tn) Automotive

Industrial segment ( `1.3 tn)

(estimated at ` 3 tn) Industrial segment ( ` 1.3 tn) Automotive segment ( ` 0.9

Automotive segment ( `0.9 tn)

After market segment ( `0.8 tn)

India’s core industry growth

Sector

Coal

Crude Oil

Natural

Refinery

Fertilizers

Steel

Cement

Electricity

Overall

Gas

Products

Index

Weight

4.38

5.22

1.71

5.94

1.25

6.68

2.41

10.32

37.90

Jan-14

(0.70)

3.00

(5.20)

(4.50)

1.20

3.40

1.50

5.70

1.60

Feb-14

0.10

1.90

(4.40)

3.20

(0.70)

4.80

2.30

10.40

4.50

Mar-14

0.70

(1.60)

(9.30)

2.80

(6.10)

5.40

0.00

5.40

2.50

Apr-14

3.30

(0.10)

(7.70)

(2.20)

11.10

3.10

6.70

11.20

4.20

May-14

5.50

(0.30)

(2.20)

(2.30)

17.60

(2.00)

8.70

6.30

2.30

Jun-14

8.10

0.10

(1.70)

1.20

(1.00)

4.20

13.60

15.70

7.30

Jul-14

6.20

(1.00)

(9.00)

(5.50)

(4.20)

(3.40)

16.50

11.20

2.70

Aug-14

13.40

(4.90)

(8.30)

(4.30)

(4.30)

9.10

10.30

12.60

5.80

Sep-14

7.20

(1.10)

(6.20)

(2.50)

(11.60)

4.00

3.20

3.80

1.90

Oct-14

16.20

1.00

(4.20)

4.20

(7.00)

2.30

(1.00)

13.20

6.30

Nov-14

14.50

(0.10)

(2.90)

8.10

(2.80)

1.30

11.30

10.20

6.70

Dec-14

7.50

(1.40)

(3.50)

6.10

(1.60)

(2.40)

3.80

3.70

2.40

*Source: DIPP

Research report: Indian Bearings Industry February 26 th , 2015 Growing IIP: a boon for

Research report: Indian Bearings Industry

February 26 th , 2015

Growing IIP: a boon for the sector

The bearing industry is an extremely capital intensive trade marred with low asset throughput and is largely dependent on varied industries. Bearings find extensive applications across power, railways, material handling equipment, defence, renewables, machine tools, mining, etc. Hence, it performs in conjunction with the performance of the Index of Industrial production. There exists a robust association given the sector allied demand structure. In the past one year, the IIP has put forth a volatile graph however; it has registered a cumulative growth of 2.1% in the April-December period as compared to a contraction of 0.4% in the corresponding period of last year. This signifies a stable performance in the manufacturing space that constitutes ~74% of the IIP. This will keep driving the industrial bearings higher.

IIP data* 8.0 5.6 6.0 3.7 3.9 3.8 4.0 2.8 1.7 2.0 0.8 0.4 0.5
IIP data*
8.0
5.6
6.0
3.7
3.9 3.8
4.0
2.8
1.7
2.0
0.8
0.4 0.5
(0.5)
0.0
(2.0)
(1.8)
(4.2)
(4.0)
(6.0)

*Source: DIPP

Manufacturing PMI* Services PMI* 55 55 54.5 54.4 54 54 53 53.3 52.6 53 53.0
Manufacturing PMI*
Services PMI*
55
55
54.5
54.4
54
54
53
53.3
52.6
53
53.0
52.2
52
52.4
51.6
52
51
51.1
50.6
51.6
51.5
50
50.0
51
51.0
49
50
48
49
47
Jun'14
July'14 Aug'14 Sep'14
Oct'14 Nov'14 Dec'14
Jun'14
July'14 Aug'14 Sep'14
Oct'14 Nov'14 Dec'14

Core 8 sector growth set stage for better future performance

*Source: DIPP

Eight core sectors which include coal, electricity, cement, steel, crude oil and petroleum refinery products identified by the government comprises ~37.9% of the IIP, hence enjoys a major say in the performance of the IIP and translates into deriving value for the bearings industry. In the past one year, segments such as coal, refineries, fertilisers, cement and electricity have outperformed the India core industry growth. All these sectors listed above find a wide application of bearings. Bearings are used in boiler pumps, fans, motors, steam turbines, pillow blocks, gearboxes and material handling equipment used in the power generation industry. Power, with over 30% share in infrastructure investment, is one of the key areas of investment hence propels growth in the demand of the bearings. It enjoys the highest share in the core index and commands a relatively higher share of growth. The sector grew at an average of 9.1% throughout the year. In coal mining bearings find usage in the shovels, draglines, haul trucks, loaders, crushing, screening and material handling. It registered an average growth of 6.8% during 2014. With coal industry paving its way toward growth after the central government uplifted the mining ban in Goa and Karnataka and proposed fresh coal block allocations, the bearings industry as allied components is sure to progress.

Coal production, which has over the past few years suffered on account of various legal entanglements, has grown consistently for the past year. Natural gas continues to remain in the negative territory, with production falling 5.4%. While the sector has failed to register positive growth in any month in the past year, the pace of contraction has tapered off. Policy uncertainty over gas pricing continues to plague the sector. Meanwhile, with the recent coal block auctions which will fetch ~ ` 147bn will require extensive mining thus creating demand for bearings.

Research report: Indian Bearings Industry Incremental demand from the railways to boost growth February 26

Research report: Indian Bearings Industry

Incremental demand from the railways to boost growth

February 26 th , 2015

Apart from the aforementioned core industries, Indian railways too employ bearings extensively which are used in wheel axles, drive units, traction motors, etc. Railways are a crucial expanse of investment in the ongoing Twelfth Plan period. The arenas anticipated for private investment during the planned period comprise of Elevated Rail Corridor in Mumbai, fragments of the DFC, revamping of existing stations, power generation/energy saving projects and freight terminals. The rolling stock addition is projected to incline ~70% in the Twelfth Five Year Plan over the Eleventh Five Year Plan. We believe that such an incremental outlay would be a key carter for bearing prerequisites from the railway segment.

Additionally, in the upcoming budget, progress made on PM Narendra Modi's ambitious plan of Diamond Quadrilateral - connecting major metros and growth centres with high hustle trains would also be rolled out. As part of the plan to run semi-high speed trains on several corridors, the budget is likely to propose indigenously built coaches or train sets to run at 200 km per hour speed in keeping with the Modi government's 'Make in India' initiative. The north-east is going to be another key focus area as the budget may announce the introduction of local services to improve connectivity in the region. The ever growing focus on developing the railways bodes well for the bearings industry.

Auto sales in India to catalyse demand

25,000,000

20,000,000

15,000,000

Units

5,000,000

0

2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 11,172,275 14,057,064 17,892,409 20,382,026 20,647,611
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
11,172,275
14,057,064
17,892,409
20,382,026
20,647,611
21,481,526

*Source: SIAM

Automobile demand to boost growth

India is currently the seventh-largest automobile producer in the world with an average annual production of 17.5 million vehicles, and is on the way to become the fourth largest automotive market by volume, by 2015. With the increasing growth in demand on the back of rising income, expanding middle class and a young population base, in addition to a large pool of skilled manpower and growing technology, will propel India to be among the world's top five auto-producers by 2015.

The automobile industry accounts for 22 % of the India's GDP. India is expected to become a major automobile manufacturing hub and the third largest market for automobiles by 2020, according to a report published by Deloitte. India is currently the seventh-largest automobiles producer in the world with an average annual production of 17.5 million vehicles, and is on way to become the fourth largest automotive market by volume, by 2015. The growth story for the Indian automobile industry in 2014 rode on the two-wheeler segment. The segment has clocked a positive growth at 12.9 percent year-on-year to reach sales of nearly 13.5 million units by October 2014. The commercial vehicles (CV) industry in India has registered an increase of 8.59 % in September 2014, as fleet owners have started to buy trucks in the anticipation of an improved economic activity. The Automobile Mission Plan for the period 20062016, designed by the government is aimed at accelerating and sustaining growth in this sector. Also, the well-established Regulatory Framework under the Ministry of Shipping, Road Transport and Highways, plays a part in providing a boost to this sector.

We believe that the replacement market for bearings with shorter shelf lives will see a double digit growth, compared with single-digit in auto-sector. Going ahead, with the revival in the domestic market (which already show initial sign of revival) and higher export sales, the projections appear promising.

Research report: Indian Bearings Industry February 26 th , 2015 ‘ Make in India ’

Research report: Indian Bearings Industry

February 26 th , 2015

Make in India’ campaign augurs well for the bearings sector

The government recently launched “Make in India” campaign to make India a manufacturing hub. As the “Make in Indiastory unfolds, the road ahead for the automobile industry is anxious. The Make in India story will definitely be crusaded by the automobile and manufacturing sector as it accounts for over ~30% of the entire IIP in India thereby affecting the requirements for bearings. Thus, we believe that the following policies will catalyse the demand.

Key Government Policy:

FDI and exemption from licensing: In the auto component sector, 100% foreign equity investment is allowed via automatic route. Additionally, the manufacturing and imports in this sector are exempt from licensing and approvals. This benefits the bearings industry as it propels demand.

R&D incentives for Industry: Weighed deduction of 200% is granted to assessees for any sums paid to a national laboratory, university or institute of technology, or specified people with a specific direction and that the said sum is used for scientific research within a program approved by the prescribed authority.

For Manufacturing Facilities: Concessional excise duty of 6% extended to March 31, 2015 for manufacturers supplying batteries to producers of electrically operated vehicles.

State Incentives: Incentives are in areas like subsidised land cost, relaxation in stamp duty exemption on sale and lease of land, power tariff incentives, concessional rate of interest on loans, investment subsidies, tax incentives, backward areas subsidies and special incentive packages for mega projects. This will boost manufacturing and translate into increased demand in the bearings sector.

SWOT Analysis for Indian Bearings Industry

STRENGTHS Large domestic and OEM market Easy availability of raw materials Fast adaptability to technology
STRENGTHS
Large domestic and OEM market
Easy availability of raw materials
Fast adaptability to technology
Flexible duplication and machine customisation
Stable Business Environment
WEAKNESSES
Increasing domestic competition
Low volumes of export
Weak Marketing linkages
Lack in quality
Low level of technology as against global players

SWOT

THREATS Stiff competiton from China OPPORTUNITIES Growing domestic and International market Increasing imports
THREATS
Stiff competiton from China
OPPORTUNITIES
Growing domestic and International market
Increasing imports
Opportunities of diversification available
No entry Barrier
Enhanced need of innovation to survive
Skill degradation a major threat
Growing competion implies low input costs
Large scope for technology upgradation
Research report: Indian Bearings Industry February 26 th , 2015 Key Concerns Bearing Industry demands

Research report: Indian Bearings Industry

February 26 th , 2015

Key Concerns

Bearing Industry demands high capital allocation. Lower economic development could lead to underutilization of expensive resources and lesser absorption of fixed costs. At the same time, Bearing Industry remains very competitive. Due to weakening of global demand, imports of bearings at very low prices, especially from China have increased in recent years, posing a threat to domestic industry.

Continued increase in raw material and consumables is another area to watch. Increase in labour costs will have to be matched by a corresponding increase in productivity to retain competitiveness of the industry. Counterfeit bearing products probably account for 20% to 30% of bearings sold in replacement market. These fake products of sub-standard quality pose a threat not only to organised bearing sector but also to susceptible customers who buy such products. Thus, the bearings sector seeks active measures to safeguard the companies as well as the consumers. In this context the companies needs to take efforts to counterfeit dealers - in co- operation with competent agencies such as FICCI. The problems with the industry remain widespread but provided the rising trend in industry economics, the concerns can be met appropriately.

Key Growth Constraints

Macro Issues

The possible lowering of customs duties on auto components in the forthcoming Budget from the current level of 10.5% is a matter of concern for bearing manufacturers as it will propel imports.

Increasing presence of Counterfeit products

Regulatory

hurdles

Shift towards relatively lower steel demand growth in most of the heavy-weight economies including China

Rising steel prices

Poor growth in demand in the core consumer sectors such as infrastructure

Depreciating rupee and competitive import market will continue to impact bearings manufacturers in India

Significant amount of debt hitting margins

Research report: Indian Bearings Industry February 26 th , 2015 Comparative Analysis of Indian Bearing

Research report: Indian Bearings Industry

February 26 th , 2015

Comparative Analysis of Indian Bearing Companies

Company

Year

Sales (`bn)

EBITDA

NPM (%)

ROCE (%)

ROA (%)

EPS (` )

BVPS ( `)

ended

Margin (%)

SKF India

Dec’12

22.7

9.3

7.3

16.5

11.9

36.0

219.1

Dec’13

24.2

9.5

8.4

12.9

9.8

31.6

241.9

TIMKEN India

Mar’13

6.9

11.5

6.4

12.6

9.6

6.9

53.5

Mar’14

7.2

11.6

6.2

11.4

8.9

6.6

56.2

 

Dec’12

14.5

18.3

11.0

17.5

13.9

95.8

529.2

FAG Bearings

Dec’13

14.3

16.0

8.5

11.8

9.1

73.3

595.8

NRB Industrial

Mar’13

6.0

18.4

8.1

15.2

7.9

4.9

20.4

Mar’14

6.1

17.4

5.5

9.7

4.9

3.4

22.6

 

Mar’13

1.7

13.1

3.5

3.3

2.3

4.6

105.2

ABC Bearings

Mar’14

1.6

12.2

3.3

2.6

1.9

4.0

106.9

Outlook

The Indian Bearings Industry is well poised to achieve strong growth in coming years owing to rising domestic demand in the auto sector and in Industrial applications. Given the government of India’s focus on the manufacturing sector, Indian Bearings Industry is expected to grow in the coming years. The government has already made clear its continuing focus on infrastructure from Power and Oil & Gas, Roads, Ports and Airports. As per the planning commission’s estimates, the government has planned substantial investment in the 12th Five Year Plan aggregating USD 1 tn. This infrastructure spending will lead to growth in the manufacturing sector, which in turn will have a positive impact on bearings industry.

As per the Auto Components Manufacturers Association (ACMA), the Indian friction components industry is likely to grow to US$ 110 billion by 2020 capturing the domestic market share of ~US$ 80 billion. The share of the auto components industry in the country’s GDP is likely to increase to 3.60% by 2020, up from 2.40% in FY12.

Given decent extensive demand scenarios in the domestic market and with India evolving as a preferred low-cost sourcing destination, bearings manufacturers are likely to capitalise on the increasing production capacities and technological capabilities. Further, companies are likely to continue to diversify their product portfolio and de-risk their businesses. Though, competition is anticipated to increase and prices of raw material are likely to trail an upward movement. This is expected to exert pressure on the industry’s profit margins. In such a scenario, cost control programmes would assume greater significance for the industry players, both big and small.

Research report: Indian Bearings Industry

SKF India Ltd.

February 26 th , 2015

Business Overview

Stock Data

 

SKF India Limited is an India-based company. The Company manufactures bearings and related components, which are used in a range of applications across industries. Its products include bearings, seals, lubrication solutions, linear motion, actuation systems, maintenance products, condition monitoring, coupling systems, among others. The Company serves a range of industries, including aerospace, agriculture, automation, compressors, construction, electric motors, food and beverage, home appliances, industrial pumps, machine tools, marine, metals, railways, among others. It has 3 manufacturing facilities located in Pune, Bangalore and Haridwar, 11 sales offices across India and a supplier network of over 300 distributors.

Current Market Price ( ` )

1,400.0

Target Price ( ` )

1,660

Potential upside (%)

18.5

Reuters Code

SKFB.NS

Bloomberg Code

SKF:IN

Key Data

 

Market Cap (` bn )

74.0

52-Week Range ( ` )

1,509/661

Investment Rationale

1-yr Avg. Daily Trading Value ( `mn)

17.5

Promoters (%) 53.6

Promoters (%)

53.6

FII

Holding (%)

9.4

 

DII

Holding (%)

22.6

Public & Others Holding (%)

14.4

For the fourth quarter ended Dec'14, net sales of the company were reported at ` 6,154.3 mn that increased marginally by 2.64% as against ` 5,995.9 mn in the corresponding period last year. In line with this, operating expenses grew by 6.20% to ` 5,628.1 mn from ` 5,299.3 mn mainly due to increase in raw material cost by 18.87% to ` 1,540.9 mn increase in employee expenses by 51.7% to ` 62.91 mn and increase in other expenses by 1.39% to ` 353.39 mn. On account of higher rise in operating expenses than sales, operating profit decreased proportionately by 24.46% to ` 526.2 mn from ` 696.6 mn. Other Income grew by 26.75% at ` 215.6 mn. Depreciation grew by 4.50% at ` 137.0 mn and taxation decreased by 22.13% at ` 196.0 mn. Net Profit was reported at ` 408.8 mn that decreased moderately by 15.52% as against `483.9 mn in the corresponding period last year. OPM reported at 8.55% that decreased by 307 basis points. NPM reported at 6.42% that decreased by 143 basis points.

NPM reported at 6.42% that decreased by 143 basis points. SKF caters to ~25-30% market share

SKF caters to ~25-30% market share in the bearings industry in India and is dependent on the automotive and industrial segments for its sales. After experiencing a slowdown in the recent past, the company is expected to be back on track mainly due to catalysts such as cooling off inflation, implied rate cut and pick up in automobile demand.

Valuation

The company, which already enjoys a dominant position in the market, is looking to gain a greater foothold by expanding its distributor network for industrial bearings to cater to the replacement demand. It aims to achieve the same by the enhanced provision of new value-additions, such as energy monitoring services, Stop-go for two-wheelers and rotor positioning bearings - all of which focus on reducing emissions - will also help margin expansion. These products that account for 12% of the top-line are likely to aid margins. With the current stature and strategic steps, the company continues to be a good bet in the bearings segment.

Fiscal Year Ended

Y/E March ( `mn)

FY13

FY14

EBITDA Margin (%)

9.3

9.5

NPM (%)

7.3

8.4

EPS ( ` )

36.0

31.6

Book Value per share ( ` )

219.1

241.9

P/BVPS (x)

2.9

2.7

EV/EBITDA

9.3

9.6

ROCE (%)

16.5

12.9

ROA (%)

11.9

9.8

*Consolidated

One Year Relative Price Performance 250 200 150 100 50 0 NIFTY SKFINDIA Feb-14 Mar-14
One Year Relative Price Performance
250
200
150
100
50
0
NIFTY
SKFINDIA
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
F b-15

Research report: Indian Bearings Industry

 

February 26 th , 2015

FAG Bearings Ltd.

Business Overview

Stock Data

 

FAG Bearings India Limited is engaged in the manufacture of ball/roller bearings and related components. The Company’s product portfolio includes ball bearings, cylindrical roller bearings, tapered roller bearings and spherical roller bearings. The Company caters to industry segments including:

Current Market Price ( ` )

 

3,835.5

Target Price ( ` )

 

4,795

Potential upside (%)

 

25.0

construction machinery, electrical engineering, fluid technology, conveying equipment, industrial gears, mining and cement, power generation, agricultural engineering, steel plants, motorcycles, textile machinery, machine tools, wind power, pulp and paper and other. The Company’s manufacturing plants are located at Vadodara, Gujarat.

Reuters Code

 

FAG.NS

Bloomberg Code

 

FAG:IN

Key Data

 

Market Cap (` bn )

 

64.7

Investment Rationale

52-Week Range ( ` )

 

4,150/1,558

For the fourth quarter ended Dec'14, net sales of the company reported at ` 4, 295.0 mn that increased marginally by 6.69% as against ` 4,025.6 mn in ` 4, 295.0 mn that increased marginally by 6.69% as against ` 4,025.6 mn in the corresponding period last year. The operating expenses of the company too increased by 4.09% to ` 3,671.4 mn from ` 3,527.1 mn mainly due to increase in employee expenses by 33.41% to ` 349.0 mn and other expenses by 17.48% to ` 1,514.0 mn. On account of higher rise in sales than operating expenses, operating profit increased proportionately by 25.10% to ` 623.6 mn from ` 498.5 mn. Other Income decreased by 26.72% at `114.1 mn. Interest grew by 70.59% at ` 2.9 mn whereas depreciation grew by 5.13% at ` 124.9 mn and taxation grew by 14.14% at ` 210.7 mn. Net Profit was reported at ` 399.2 mn that increased moderately by 14.35% as against ` 349.1 mn in the corresponding period last year. OPM reported at 14.52% that increased by 214 basis points. NPM reported at 9.05% that increased by 70 basis points.

1-yr Avg. Daily Trading Value

 

170

Promoters (%)

 

51.3

FII

Holding (%)

4.3

DII

Holding (%)

18.3

Public & Others Holding (%)

 

26.1

Fiscal Year Ended

 

Y/E March ( `mn)

FY13

FY14

EBITDA Margin (%)

18.3

16

NPM (%)

11.0

8.5

EPS ( ` )

95.8

73.3

Book Value per share ( ` )

529.2

595.8

P/BVPS (x)

3.2

2.7

 

EV/EBITDA

9.9

10.6

ROCE (%)

17.5

11.8

ROA (%)

13.9

9.1

The company enjoys the status of market leader in spherical roller bearings and is likely to derive better revenues arising from that. High fuel efficiency, right sizing, emission control, friction reduction and increased driving comfort together with high safety are some of the emerging trends in automotive sector ensure positive revenues in the long run.10.6 ROCE (%) 17.5 11.8 ROA (%) 13.9 9.1 Valuation Rising aspiration of middle class, growing

Valuation

Rising aspiration of middle class, growing prosperity in rural markets and increasing urbanisation will drive demand of both private and public transportation. From FAG’s product portfolio, innovations like Generation 2 and Generation 3 of Wheel Bearing with / without ABS sensors, Low-friction Ball Bearings and customised products for motorcycle and passenger car transmission have received strong customer acceptance. Hence, we remain optimistic on the stock.

*Consolidated

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Research report: Indian Bearings Industry NRB Industrial Bearings Ltd. February 26 th , 2015 Investment

Research report: Indian Bearings Industry

NRB Industrial Bearings Ltd.

February 26 th , 2015

Investment Rationale

NRB Industrial Bearings Ltd (NIBL), established in 2012, is a group company of NRB Bearings Ltd. Having de-merged from the parent company, NIBL came into being on Oct 1, 2012. The company is engaged in the manufacturing and selling of ball and roller bearings for industrial applications with major focus on textile machinery, Industrial Gear Boxes, Paper, Packaging, Electricals, Agriculture, Cement, Automation, Material Handling, Metals and Bottling/canning plants etc. Given the surge in demand among the key industrial players, the company expects improved sales turnover and better profitability in the 15 month period ending

Mar’15.

Investment Rationale

We expect the company’s revenues to grow by ~41% for the 15 months period ending Mar’15 and the company’s revenues to grow by ~41% for the 15 months period ending Mar’15 and to be followed by a growth of ~33% in FY16E and in FY17E, respectively, driven by expansion in NIBL’s core Industrial bearings business. Post de-merger from the parent company, NIBL would now be able to generate improved operational efficiencies, given the management’s focus over a single business entity. Higher revenue coupled with lower operating expenses would help EBITDA margin to turn positive to 4.2% in FY16E and to grow further to 20.8% in FY17E.

NIBL posted discouraging numbers in the third quarter ended Sep’14. The total operating income came in at ` 75.3 mn, reflecting a 13.8% QoQ growth The total operating income came in at ` 75.3 mn, reflecting a 13.8% QoQ growth following two consecutive quarters of decline. The same, however, declined by 0.8% on a year-on-year basis impacted by the slowdown in the European market, Europe being a major consumer of the company’s products. On operational front, NIBL reported gloomy numbers with an operating loss of ` (23.0) mn compared to a loss of ` (14.6) mn in the previous quarter, hurt by huge rise in operating expenses by 21.7% QoQ to ` 98.3 mn. Despite a triple digit growth in other income by 151.6% QoQ to ` 4.8 mn, NIBL’s net loss broadened to ` (58.5) mn in the third quarter ended Sep’14 as against a loss of ` (49.5) mn in the previous quarter. On the back of expectations for new product offerings and improvement in efficiencies, we remain optimistic for the NIBL’s performance in the coming financial period of 15 months. A steady growth in Indian economy and a surge in demand may also result in improved sales turnover and better profitability.

Valuation Expectations of improvement in the Indian economy raise the outlook for Industrial bearing industry, which in turn will have a positive impact on NIBL. Post de-merger from NRB Bearing, which is a key player in domestic bearings industry, the management’s focus on the company’s operations would increase, which is likely to improve the company’s capabilities going forward. Expectations for an improvement in the global economy further strengthen NIBL’s position as a significant part of the company’s revenue comes from exports.

Stock Data

Current Market Price ( ` )

35.0

Target Price ( ` )

43

Potential upside (%)

20.0%

Reuters Code

NIBL.NS

Bloomberg Code

NIBL:IN

Key Data

 

Market Cap (` bn )

9.4

52-Week Range ( ` )

46/17

1-yr Avg. Daily Trading Value ( `mn)

0.2

Promoters (%)

72.6

FII

Holding (%)

7.9

DII

Holding (%)

0.0

Public & Others Holding (%)

19.5

Fiscal Year Ended

Y/E March ( `mn)

FY13

FY14

EBITDA Margin (%)

18.4

17.4

NPM (%)

8.1

5.5

EPS ( ` )

4.9

3.4

Book Value per share ( ` )

20.4

22.6

P/BVPS (x)

2.7

2.5

EV/EBITDA

(13.1)

(29.6)

ROCE (%)

15.2

9.7

ROA (%)

7.9

4.9

*Consolidated

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Research report: Indian Bearings Industry February 26 th , 2015 Disclaimer: “This document has been

Research report: Indian Bearings Industry

February 26 th , 2015

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