Indian Bearing Industry

This Ball is on a Roll...

Analyst
Ajay Shethiya +(91 22) 2685 0101 shethiya@indiainfoline.com

October 18, 2003

Dealing (+91 22)2685 0505 Sandeepa Vij 98201 92387 Biren Patel 98204 43920

Its all about money, honey!

Indian Ball Bearing Industry : This Ball is on a Roll...

Indian Bearing Industry

SECTOR RESEARCH

Investment Perspective
Bearing Industry is likely to witness good times ahead riding on auto sector boom, economic revival and export growth. Valuations of bearing companies have not seen the kind of run up seen by Auto Ancillary peer group due to concerns over industry demand-supply dynamics and huge presence of unorganized sector. However we expect the leading players in the bearing industry to report a better performance over the next two years, as demand growth in key user industries is expected to rise sharply. The automobile industry is the largest user segment for Indian bearing market accounting for almost 45% of total demand. The sector grew 16.5% yoy in FY03 and registered a similiar growth of 16.5% yoy in September 2003 . We expect all segment of automobile industry to report strong growth in the coming year. Infrastructure has received a fillip in last 2 years through N-S-E-W corridor and Golden Quadrilateral projects. The transformation of road transport through these initiatives as well as higher economic growth would lead to higher demand for commercial vehicle industry. Passenger Cars continue to grow in double digit driven by rising aspirations and cheap and easy availability of finance. Within two wheelers, we expect motorcycle industry growth to continue on its growth path. After two bad years, the tractor industry is also likely to witness a turnaround with completion of inventory correction phase and good monsoons is likely to drive demand. The engineering sector is the second largest user segment for Indian bearing market accounting for 28% of bearing sales. The manufacturing sector has grown at 6% in FY03 and capital goods have shown a robust growth of 10.5% in FY03. The Indian economy is expected to grow by 6.5-7% in FY03-04. The overall revival in industry and manufacturing will drive capital investments and spur growth in the engineering industry the second largest customer for bearings industry. Exports of bearing companies has increased at a CAGR of 13% during the last 5 years. The domestic players are sensing the outsourcing opportunity and have initiated the process of producing a range of bearings for meeting the requirement of the parent or other global customers.

October 17, 2003

Recommendations

Buy

FAG Bearings CMP Rs: 98 ABC Bearings CMP Rs: 15 SKF Bearings CMP Rs: 84 NRB Bearings CMP Rs: 114

October 18, 2003

Indian Ball Bearing Industry : This Ball is on a Roll...

Industry Structure
SECTOR RESEARCH

The Indian bearing industry is estimated at Rs30bn. The Industry has established a highly diversified product range of around 1000 types of bearings, having high volume demand. The domestic industry caters to almost 70% of total demand for common varieties and sizes of bearings. The remaining demand to the tune of 30% is being imported, essentially for industrial applications and special purpose. Bearing Industry in India can be divided into three segments the organized sector, unorganized sector and imports. The organized sector primarily caters to the OEM segment, which are predominantly automotive, railways and other industrial users. The replacement, market is dominated by unorganized sector. Exhibit 1 shows the industry structure of bearing industry.
Exhibit1: Industry Structure
Industry Structure 30% 15% 55%

Domestic Organized

Domestic Unorganized

Imports

Organized Sector
The organized sector comprises of 12 leading manufacturers who contribute to over 55% of the total turnover. The total investment in the organized sector is about Rs17bn with an annual installed capacity of 234mn bearings and employs more than 14000 people. Most of the big players are having either technical or financial collaboration with leading auto manufacturers. International collaboration gives access to best technology in the world. Exhibit 2 represents the strong domestic presence and international collaboration of few big domestic players.
Exhibit2: Global collaboration
Sl.No 1 2 3 4 5 6 7 Company FAG Bearing India SKF India NRB ABC Bearings Ltd Timken India Bimetal Bearings Ltd. Gabriel India Collaboration FAG,Germany SKF,Sweden Nadella,France NSK, Japan Timken, USA Clevite Corp,USA Repco,Australia Suspension,Italy Domestic Presence Spherical Roller Bearing Ball Bearing Needle Roller Bearing Taper Roller Bearing Ball & Roller Bearing Engine Bearing Bimetal Bearing

Source: CompanyAnnual Report /India Infoline Research

October 18, 2003

Indian Ball Bearing Industry : This Ball is on a Roll...

SECTOR RESEARCH

Huge Unorganized Sector

The unorganized sector includes the small-scale manufacturers and manufacturers of spurious bearings. The unorganized sector contributes to almost 15% of total industry turnover. The unorganized sector players have a strong regional presence and mainly cater to the needs of the replacement market.

Imports
30% of total demand for bearing industry is met by imports. While a part of the imports come through official channels, there is also a huge volume of illegal imports. Legal Imports generally represent the specialized bearings not manufactured in India. There are a large variants of imported bearings, each holding a small market share in India. Though, the quality of bearings manufactured by large players in India is comparable to world standards, domestic manufacture is not viable due to the small size of the market segment. It becomes uneconomical to manufacture such type of bearings as it includes huge capital expenditure. Illegal imports generally represent the entry of spurious imports of bearings. In the past, the Indian bearings industry was highly protected on account of very high import duties ranging from 150% to 240% ad valorem. As a result , illegal imports via smuggling and under invoicing of imports was the order of the day, accounting for a high 45-50% of total imports. While duty rates have come down over the last few years, a few countries like China, Russia, Eastern Europe dump their excess production at a very low rate. This leads to a huge price differential between domestic and imported bearings (almost 40-50%), encouraging imports. Exhibit3 shows the current duty structure on bearigns.
Exhibit3: Present Duty Structure
Category Ball bearings Tapered roller bearings, including cone and tapered roller assemblies Spherical roller bearings Needle roller bearings Other cylindrical roller bearings Other, including combined ball/roller bearings Balls, needles and rollers Other
Source: nic.in.budget

Rate of Duty 30% 30%

30% 30% 30% 30% 30% 30%

October 18, 2003

Indian Ball Bearing Industry : This Ball is on a Roll...

Market Dynamics
SECTOR RESEARCH

Original Equipment Manufacturers (OEM) Market

The OEM market for bearing represent the demand arising out of the original vehicle and industrial manufacturers. The demand for the OEM market directly depends upon the growth in user industry. OEM market accounts for 40% of total demand of bearing industry. This market is characterized by requirements of high quality, stringent delivery norms and lower margins. OEMs have been facing price competition in their own markets, continue to exert price pressure on the local bearing suppliers. The bearing capacity available in the country is in excess of demand, resulting in price reduction. The OEM bearing market is likely to witness better days ahead on account of up swing in automobile industry and manufacturing sector.

Replacement Market
The replacement market represents the demand arising on account of replacing the used and worn-out bearings. The size of replacement market is dependent on equipment population and frequency of maintenance. Replacement market accounts for 40% of total demand for bearing industry. The margins in this market are relatively higher placed as compared to OEM market. The replacement market is highly price sensitive and has higher share of unorganized players and cheaper imported bearings. Exhibit4 represent the bearing demand per sector.
Exhibit 4: Bearing Demand Per Sector.
Market Dynamics

OEM Market 60% Replacement Market 40%

Source: Industry

In the last two years, Indian automobile and industrial sectors were facing a slowdown. This has led to lower growth in OEM segment and higher growth in replacement demand. The organized players have been concentrating on improving share in the replacement market.

October 18, 2003

Indian Ball Bearing Industry : This Ball is on a Roll...

SECTOR RESEARCH

Key Industry Players

The bearing industry in India is dominated by 12 organized players accounting around 55% of industry sales. SKF Bearing is the major player in the Indian bearing industry with a market share of 12%. However, as seen from the table, the share of major players has been declining, indicating entry of small payers and imports into the industry. Exhibit5 represents the trend in market share of leading bearing manufacturers.
Exhibit 5: Changing Industry Trends
Trends in Market Share 95-96 96-97 97-98 98-99 99-00 00-01 01-02 12.39 8.98 8.98 4.23 7.52 4.01 4.23 3.14 5.30 2.41 4.01 1.62 2.80 1.19 3.14 3.20 2.41 1.98 1.62 1.90 65.08 32.92 2.00 100.00 67.08
% to total market size

SKF Bearings India 15.99 15.39 15.53 13.84 12.90 12.32 National Engineering Inds 13.31 14.80 12.78 13.13 10.92 10.29 FAG Bearings India 5.43 5.27 6.53 6.56 6.34 6.94 Timken India 4.19 5.72 5.05 5.02 5.47 4.73 NRB Bearings 3.82 4.22 4.29 4.25 4.47 4.40 TISCO 4.71 4.03 3.14 3.51 3.69 3.74 ABC Bearings Ltd. 4.77 4.72 3.47 3.01 3.88 3.65 Mahindra Sintered Products 3.50 3.14 3.54 3.31 3.35 3.29 Sujana Industries 0.06 0.38 0.06 0.06 0.92 3.13 Kirloskar Oil Engines 3.03 2.92 3.04 2.81 2.85 2.52 Bimetal Bearings 2.79 2.69 2.26 2.19 2.34 2.32 HMT Bearings 2.19 2.06 2.10 1.99 2.03 1.90 Harsha Engineers 0.00 0.00 1.31 1.50 1.89 1.86 Gabriel India 1.41 1.39 1.53 1.10 1.14 1.18 ARB Bearings 0.00 0.00 0.00 0.58 0.69 0.96 Austin Engineering Co. 1.63 1.69 1.88 1.42 1.10 0.93 Mipco Seamless Rings (Gujarat) 0.97 1.17 0.88 0.62 0.88 0.77 Asian Bearing 1.85 1.86 1.62 1.81 1.24 0.73 SBL Industries 1.62 1.22 1.36 1.02 0.81 0.63 Texspin Bearings 0.00 0.00 0.00 0.53 0.56 0.55 Total for above companies 71.29 72.68 70.36 68.26 67.48 66.84 Imports 24.82 23.59 25.12 25.96 26.57 28.19 Others 3.89 3.73 4.52 5.78 5.95 4.97 Total 100.00 100.00 100.00 100.00 100.00 100.00 Total Domestic Production 75.18 76.41 74.88 74.04 73.43 71.81
Source: CMIE/ India Infoline Research

October 18, 2003

Indian Ball Bearing Industry : This Ball is on a Roll...

SECTOR RESEARCH

Sales Revenue of Key Players

Company 95-96 SKF Bearings Ind 3449 National Engg Inds 2871 Timken India 904 FAGBearings India 1172 Timken India 904 NRB Bearings 824 TISCO 1016 ABC Bearings Ltd. 1028 Kirloskar Oil Engines 653 Bimetal Bearings 602 Gabriel India 303 Austin Engg. Co. 350 Mipco Seamless Rings209.3 Total of aboveCo. 14291 Other 1922 Total Sales 16214 Total Imports 5354 Exports 588 Total Market Size 21568
Source: India Infoline Research

96-97 97-98 3781.5 3416.6 3637 2812 1406 1110.5 1296 1436 1406 1110 1036 943 990 690 1160 763 717 669 661 498 341 336 415 414 288 193 17139 14394 1639.3 2084 18779 16478 5799 5528 692 1285 24578 22006

98-99 3300.5 3130 1197 1564 1197 1013 836 717 670 521 261 338 149 14898 2753 17651 6190 1692 23841

99-00 3491 2953 1480 1714 1480 1209 999 1050.4 770.8 633.9 307 297 238 16627 3240 19867 7189 2198 27056

00-01 3396 2836.3 1304 1912 1304 1212 1031 1007 694 640 324 255 211 16130 3663 19794 7772 2616 27566

01-02 3334 2418 1139 2023 1139 1427 1080 752 647 533 319 241 220 15278 2779 18057 8863 2540 26920

02-03 3824 2349 1509 2146 1139 1678 1102 819 692 573 325 235 46 16442 3417 19860E 10100E 2870E 29960E

October 18, 2003

Indian Ball Bearing Industry : This Ball is on a Roll...

Growth Drivers
SECTOR RESEARCH

The demand for bearing industry is derived from demand in two key user segments automobile and industrial sector growth. The automobile industry is the largest growth driver for OEM market as it accounts for almost 45% of total bearing market. Engineering sector, which accounts for 28% of total share, holds the second growth driver. Considering the high reliance of bearing industry on automobile sector, the fate of bearing industry is largely dependent on production of vehicles. The demand of bearing is also linked to heavy-duty industrial application in rolling stock, rolling mills, heavy earth moving equipments and other heavy machinery, accounting for 21% of total bearing market. However demand in the latter category is met through imports and therefore does not have significant impact on domestic growth .Exhibit 6 shows the contribution of various user segments to the total bearing industry demand.
Exhibit6: User-Segments to Bearing Industry
Heavy Industries including railways 21%

User-Segments
Electrical equipment & other 6%

General Engineering 28%

Automobile 45%

Source: BRBMA/India Infoline Research

Up Swing in Automobile Sector

The Indian Automobile sector has grown 16.5% in FY03 contributed by export growth of 65.3% and domestic growth of 14.8%. The automobile industry comprising of commercial vehicles, passenger cars, multi-utility vehicles, two/three wheelers and tractors has performed extremely well in FY03. The sharp growth of this sector has been partly driven by the impact of lower interest rate on demand, intermediated by a competitive financial sector, which has steadily cut prices of automobile loans as interest rates went down. Infrastructure has received a fillip in last 2 years through N-S-E-W corridor and Golden Quadrilateral projects. The transformation of road transport industry through these initiatives will lead to higher demand for commercial vehicle industry. Passenger cars continue to grow in double digit driven by rising aspiration levels and easy availability of cheap finance. Within two wheelers, we expect motorcycle industry growth to continue on its growth path. After two bad years, the tractor industry is also likely to witness a revival with completion of inventory correction phase and good monsoons likely to drive demand. The positive outlook for auto sector augur well for bearings demand and we expect all segment of automobile industry to report strong growth in the coming year.
October 18, 2003

Indian Ball Bearing Industry : This Ball is on a Roll...

SECTOR RESEARCH

Export Potential
Exports of bearings companies has increased at a CAGR of 13% in last seven years from 1995-96 to 2001-02 at Rs2.5bn.Big players in Indian ball and roller bearing have been already exporting a part of their production to developed countries like US, Europe etc. Domestic players are already sensing the outsourcing opportunity and have initiated the process of manufacturing a range of bearings for meeting the requirements of global customers. The Indian bearing industry, especially the companies having technical/ financial collaboration with global players like SKF Bearings, FAG Bearings, Timken India, ABC Bearings and NRB Bearings are expected to garner higher pie in export market. Exhibit7 shows the export trend of bearing companies over the years.
Exhibit7: Export Trends
Export Trend 3500 3000 Exports (Rs mn) 2500 2000 6 1500 1000 500 0 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 4 2 0 12 10 8

Exports

Exports/Market Size

Source : CMIE/India Infoline Reasearch

Export revenues contributes more than 20% to net sales of FAG Bearings. It has set up a 100% EOU in Vadodara to cater to the growing export market. NRB Bearing is also planning to achieve exports share of 10% in coming year, which presently accounts for 6% of its net sales.

October 18, 2003

Exports/Market Size

Indian Ball Bearing Industry : This Ball is on a Roll...

Threats
SECTOR RESEARCH

Spurious Products
Spurious products form a significant part of the Indian bearing market. According to the study of National Council of Applied Economic Research (NCAER) on auto components, it stated that out of Rs64bn worth auto component market, spurious components accounted for about 40%, original equipment components for about 33% and unbranded products for the rest 25%. Spurious products mainly cater to the replacement market, which is price sensitive. Spurious bearings are of poor quality and are relatively unsafe and unreliable. They use material, which are of inferior quality and the workmanship is also poor. The presence of unorganized sector in the bearing industry poses a real threat to the organized players.

Import Threat
The custom duty on imported bearings has reduced from 35% to 30% in FY03 and is expected to come down further in line with WTO agreements. Reduction in import duty is likely to attract more imports in the future. The imported bearings are targeted mainly at the replacement market . Imports are widespread in the case of ball bearings. Coupled with inflow of spurious products the organized sector is also facing threat from smuggling of goods. Major imports of ball bearing are from China and have been rising. Apart from China, imports are also routed from countries such as Russia and Romania. Exhibit 8 represents imports of Ball Bearing in India and each Countrys share in total imports to India.
Exhibit 8: Imports of Ball Bearing
(Amt in Mn) 2001-02 2002-03 Japan 689.8 676.0 German FR 459.2 525.3 China PR 465.4 438.6 Singapore 175.3 183.5 Russia 178.6 158.9 Romania 94.9 141.4 Sweden 114.7 133.5 USA 98.0 122.0 France 91.3 103.0 Korea RP 71.9 99.8 UK 72.0 68.8 Sloval RP 44.7 65.4 Italy 69.3 59.2 Belarus 29.9 57.4 Czech Republic 27.0 53.6 Total of above cos 26065.9 28272.5 Other 2681.9 2886.2 Total 28747.8 31158.7
Source: www.ieport.com/India Infoline Reasearch

Country

% Share 24.0 16.0 16.2 6.1 6.2 3.3 4.0 3.4 3.2 2.5 2.5 1.6 2.4 1.0 0.9 93.3 6.7 100 21.7 16.9 14.1 5.9 5.1 4.5 4.3 3.9 3.3 3.2 2.2 2.1 1.9 1.8 1.7 92.6 7.4 100

yoy % (2.0) 14.4 (5.8) 4.7 (11.0) 49.0 16.3 24.4 12.8 38.9 (4.4) 46.5 (14.6) 91.6 98.7

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Indian Ball Bearing Industry : This Ball is on a Roll...

SECTOR RESEARCH

Increase in Raw Material Prices

Steel and alloy steel forms the basic material for the manufacturing of bearings, account for almost 45% of total net sales. Steel prices therefore has significant impact on margins. Steel prices have appreciated 40% since January 2002. The significant increase in steel prices have resulted in pricing and margin pressure on bearing manufacturers. We expect the steel prices to show an upward trend or atleast remain firm in the coming future. A look at the price trends in last nine successive quarters shows an increasing trend in HR and CR coil prices. Exhibit9 shows the HR & CR coil price in successive nine quarters.
Exhibit 9: Price Trend

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Indian Ball Bearing Industry : This Ball is on a Roll...

FAG Bearings
SECTOR RESEARCH

Recommendation BUY CMP 52 week H/L Market Cap Rs 98 Rs 101/44 Rs 1.6bn

Incorporated in 1962,as precision Bearings India Ltd., rechristened as FAG Bearing India Ltd., in the year 1999.It is a subsidiary of INA Schaeffler KG, Germany, and FAG, Germany.FAG Bearing is a leading OEM supplier to the automotive industry, mechanical and electrical engineering industry, apart from the railways. It has an annual installed capacity of 22mn.The manufacturing plant of the company is located at Maneja in Vadodara. In the spherical roller bearing segment FAG Bearings commands market leadership with around 52% of market share and notable market share of 31% and 17% in the cylindrical roller bearing and ball bearing, segment respectively.
Segment-Wise Share Ball Bearing 17% Spherical Roller Bearing 52%

Share Holding Pattern Promoters Institutional Investors Other Investors General Public

% 51.00 13.73 11.17 24.10

Cylindrical Roller Bearing 31%

Investment Rationale
Export Drive FAG Bearing India Ltd. set up the countrys first 100% export-oriented unit for bearings. The company is also planning to set up two more plants in Vadodara. At present, it has a manufacturing unit and a 100% EOU in Vadodara. Bearings manufactured from EOU plant have already received staggering recognition from European and US customers such as Daimler Chrysler, Volvo, Volkswagon, Renault, Voith, Otis and General Dynamics.Exports of Rs444.1mn in 2002 contributed to more than 20% to net sales. Contribution from EOU and companys initiative to upgrade non-EOU plant in order to meet export needs will further supplement the company to achieve higher exports. Entry in Taper Roller Segment FAG Bearings in joint venture with FAG Roller Bearing Pvt. Ltd., launched their first indigenously produced tapered roller bearings unit in Indian market at Chakan, Pune.The plant has the annual installed capacity of 2mn tapered roller bearings sets. This will help the company to tap highly competitive taper roller bearing segment of Rs4000mn.In this move the company has already created dealer network and upgraded their facilities. This will mitigate the product risk and generate additional revenues. With entry into taper rolling bearings, it will cater to the complete range of bearings.

Share Price Chart

250000 200000 150000 100000 50000 11-Nov-02 0 10-Oct-02 08-Jan-03 04-Jun-03 02-Jul-03 06-Mar-03 05-Feb-03 10-Dec-02 04-Apr-03 30-Jul-03 28-Aug-03 07-May-03 25-Sep-03 120 100 80 60 40 20 0

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SECTOR RESEARCH

Expanding Product portfolio

It has established a milestone in product development by developing 84 types of bearings in the year and plans to add more to the portfolio. FAG Bearing has signed a new technical know-how agreement with FAG Hanwha Bearing Corporation, Korea for few special bearings and with its parent for Arcanol greases. Valuation At the current price of Rs98, the stock is trading at P/E of 7.2x FY03E earnings of Rs13.5. We expect the company to show better results, on account of export potential and product diversification. For FY02, the ROCE and ROE stood at 24.9% and 17.6% respectively.

Financial Review
FAG Bearings has maintained consistent growth in spite of intense competitive pressure on prices, margins and low volumes of orders from customers. The company was able to achieve better profits on account of extensive cost reduction measures and focussed product mix planning. The net sales of the company grew 9.2% to 2472mn while, net profit grew 31.6% yoy to Rs197.7mn in 2002 as against Rs150.2mn in 2001. The EPS has registered a growth of 32% increasing from Rs.9 in 2001 to Rs.11.9 in the 2002. FAG Bearings has declared a dividend of 40% for 2002. FAG has maintained the same increase in topline for H1 F12/03, the sales has increased to Rs1235 in H1 F12/03 from Rs1133mn in H1 F12/02.Interest burden has significantly dipped 50.4% to Rs19.5mn in H1 F12/03 from Rs39.3mn in H1 F12/02.
Financials Highlights
Period to Rs mn Sales Other income Total income Expenditure Operating profit Interest Depreciation PBT Tax PAT Extraordinary items APAT OPM (%) Equity EPS (Rs) H103 (6) 1235 8.9 1243.6 (1005.6) 238.0 (19.5) (82.5) 136.0 (35.5) 100.5 0.0 100.5 18.6 166.2 12.1 H102 (6) 1133 1.0 1133.7 (906.2) 227.5 (39.3) (76.0) 112.2 (26.2) 86.0 0.0 86.0 20.0 166.2 10.3 Growth (%) 9.2 790.0 9.7 11.0 4.6 (50.4) 8.6 21.2 35.5 16.9 0.0 16.9 (7.2) 0.0 16.9

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Indian Ball Bearing Industry : This Ball is on a Roll...

SECTOR RESEARCH
Period to Rs mn Sales Other income Total income Expenditure Operating profit Interest Depreciation PBT Tax PAT Extraordinary items APAT OPM (%) Equity EPS (Rs) 2001 (12) 2274 6.9 2281.0 (1848.0) 433.0 (79.8) (161.0) 192.2 (42.0) 150.2 0.0 150.2 18.7 166.2 9.0 2002 (12) 2472 12.8 2484.8 (2001.5) 483.3 (59.6) (169.8) 253.9 (56.2) 197.7 0.0 197.7 19.0 166.2 11.9 2003E (12) 2694 14.0 2708.5 (2196.0) 512.5 (45.0) (170.0) 297.5 (72.9) 224.6 0.0 224.6 18.5 166.2 13.5 2004E (12) 2964 12.0 2975.9 (2400.8) 575.1 (46.0) (185.0) 344.1 (84.3) 259.8 0.0 259.8 19.0 166.2 15.6

Production Trends and Segmentwise Revenues

Capacity Bearings (Ball & Roller) Production Bearings (Ball & Roller) Components Sales Volumes Bearings & Components (Traded) Bearings (Ball & Roller) Components Units 000 Units 000 000 Units 000 000 000 1999 20371 1999 17449 114 1999 23 17487 119978 1999 120 1714 5 2000 20371 2000 20686 149 2000 28 20315 136343 2000 139 1912 6 2001 22000 2001 21733 104 2001 51 22455 133528 2001 193 2024 10 2002 22050 2002 24656 139 2002 66 23823 89077 2002 290 2146 7

Sales Value Units Bearings & Components (Traded) Rs.(Mn) Bearings (Ball & Roller) Rs.(Mn) Components Rs.(Mn)

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Indian Ball Bearing Industry : This Ball is on a Roll...

ABC Bearings
SECTOR RESEARCH

Recommendation BUY CMP 52 week H/L Market Cap Rs 15 Rs 25/4 Rs 0.2bn

Incorporated in 1961, Anti Friction Bearing Corporation Ltd., renamed itself to ABC Bearings in the 2002.In 1998,it entered strategic alliance with NSK, Japan. ABC Bearing manufacturers tapered roller bearing and cylindrical bearing. It has annual installed capacity of 8.3mn.The plants are located at Lonavala and Bharuch.

Investment Rationale
Strong Turnaround ABC Bearings made a strong turnaround in FY03 reporting a profit of Rs14.6mn as against a loss of Rs47.5mn in FY02. Efficient working capital management, utilization of cost-effective measures, reduction of excess work force, surrogating of expensive loans has assisted the company to put itself in black and see a strong turnaround for itself. This initiative has enabled operating margins to increase from 10% in FY02 to 16% in FY03.The company is currently under utilizing its capacity to the extent of 60%. Any increase in further utilization of existing capacity will generate higher profits as the company has already turned around. NSK Alliance Paying Off NKS Ltd., Japan has been rendering valuable technical support and guidance to the company in the field of technical-upgradation and system improvements. Being the only lucrative player in organized bearing sector, there is possibility of equity participation from NSK.This will further strengthen the alliance and help ABC Bearing to explore new markets and clients. The current supply to Toyota Kirloskar was possible only due to NSK alliance. Cost Cutting Initiatives During the current year, ABC Bearings has undertaken major initiatives in order to reduce the cost structure. During February - March 2003, it swapped expensive debt with lower interest bearing debt. The steps towards reorganization of plant layout, reduction in labor cost and severe reduction in fixed cost will help the company to earn higher operating margins in the coming years. New Order from TKM ABC Bearings has been identified as sole supplier of specialized bearings for application in their transmission by Toyota Kirloskar Motor Limited. In order to meet the fresh requirement, company is currently in the process of installing the machinery,while the fresh order is expected to commence from FY04 adding Rs100-200mn every year to companys topline. ABC already enjoys being the exclusive indigenous supplier of Taper Roller bearing for TKMs Qualis vehicles.

Share Holding Pattern Promoters Institutional Investors Other Investors General Public

% 26.02 22.22 29.25 22.51

Share Price Chart

180000 160000 140000 120000 100000 80000 60000 40000 20000 0 30 25 20 15 10 5 15-Nov-02 0 03-Jan-03 28-Jan-03 06-Jun-03 30-Jun-03 21-Feb-03 11-Dec-02 11-Apr-03 22-Jul-03 13-Aug-03 05-Sep-03 15-May-03 29-Sep-03

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SECTOR RESEARCH

Financial Review
Annual Analysis For the FY03 ABC Bearing has shown a remarkable recovery with net profits standing at Rs14.5mn as against the loss of Rs.47.5mn in FY02.The net sales of the company grew 12% yoy to Rs725mn in FY03 as against Rs649mn in FY02. The setback in the tractor sector has affected the sales volume of the company. Exports of the company have marginally to Rs24.1mn from Rs8.3mn in FY02. The net profits of the company for Q1FY04 grew 186% to Rs9.3mn as against a loss of Rs10.1mn in Q1FY03.The annualized EPS for the same period has increased to Rs3.2 from Rs -3.7. Valuation At the current price of Rs15, the stock is trading at P/E of 3.5x FY04E earnings of Rs4.2. We expect the company to show better results, on account of effective turnaround and better utilization of existing capacity. For the FY03, the ROCE and ROE stood at 21% and 7.7% respectively.

Financial Highlights
Period to Sales Other income Total income Expenditure Operating profit Interest Depreciation PBT Tax PAT Extraordinary items APAT OPM (%) Equity EPS (Rs) Q1FY04 (3) 183 3.1 186.4 (147.8) 38.6 (8.2) (16.8) 13.6 (4.2) 9.3 0.0 9.3 19.3 115.5 3.2 Q1FY03 (3) 157 2.1 158.9 (144.5) 14.4 (16.9) (12.6) (15.1) 4.3 (10.8) 0.0 (10.8) 7.8 115.5 (3.7) Growth % 16.8 52.4 17.3 2.3 168.7 (51.4) 33.5 (189.7) (197.7) (186.5) 0.00 (186.5) -

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SECTOR RESEARCH

FY02 FY03 FY04E (12) (12) (12) Sales 649 725 856 Other income 19.3 22.8 16.7 Total income 668.6 748.2 872.7 Expenditure (582.3) (610.9) (693.3) Operating profit 86.3 137.3 179.3 Interest (73.7) (60.8) (43.0) Depreciation (40.9) (54.7) (67.3) PBT (28.2) 21.8 69.1 Tax (19.3) (7.2) (20.7) PAT (53.4) 14.6 48.3 Extraordinary items 0.0 0.0 0.0 APAT (53.4) 14.6 48.3 Production Trends and Segmentwise Revenues OPM (%) 10.3 15.8 19.0 Equity 115.5 115.5 115.5 EPS (Rs) (4.6) 1.3 4.2

Period to

FY05E (12) 1018.6 17.0 1035.6 (825.0) 210.5 (44.0) (70.0) 96.5 (29.0) 67.6 0.0 67.6 19.0 115.5 5.9

Capacity Bearings (Ball & Roller) Production Bearings (Ball & Roller) Components Sales Volume Bearings (Ball & Roller) Components Sales Value Bearings (Ball & Roller) Components

Units 2000 000 15300 Units 000 000 Units 000 000 Units Rs.(Mn) Rs.(Mn) 2000 6623 2000 6444 2000 1050 -

2001 8300 2001 4584 2001 5223 2001 1008 -

2002 8300 2002 3010 2002 3315 2002 752 -

2003 8300 2003 3331 439 2003 3280 436 2003 820 20

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Indian Ball Bearing Industry : This Ball is on a Roll...

SKF Bearings
SECTOR RESEARCH

Recommendation BUY CMP 52 week H/L Market Cap Rs 84 Rs 86/33 Rs 3.7bn

Share Holding Pattern Promoters Institutional Investors Other Investors General Public

% 26.02 22.22 29.25 22.51

SKF Bearing India, is a subsidiary of SKF, Sweden, the leading global supplier of rolling bearing and seals, which holds 54% stake in the company. The company manufactures a product range comprising about 60 sizes of deep groove ball bearings, 70 sizes of taper roller bearings, textile machinery components, automotive specials, bearing accessories like housings, sleeves, etc. The company currently caters to the needs of automotive, electrical and industrial OEMs and aftermarket customers. The company has annual installed capacity of the company is 71mn ball and roller bearings. Approximately 60% of the total sales of bearings are from the Original Equipment Manufacturers (OEM) sector while the remaining 40% are after market/replacement sales. In addition to its comprehensive range of bearings it is also offering a wide range of bearing related products and systems, such as Condition Monitoring Systems for Trouble-free Operations, Linear Motion products, Machine Tool Spindle maintenance etc.

Investment rationale
Strong Presence SKF Bearings has strong presence in the Indian bearing industry, commanding highest share of 12.3% in total 23mn industry. It serves to almost each and every segment of the industry. Automobile industry accounts for 35% of its total revenue. SKFs strong presence coupled with growth in automobile industry is likely to improve companys growth.
90 80 70 60 50 40 30 20 10 0

Share Price Chart

1200000 1000000 800000 600000 400000 200000 0 12-Nov-02 13-Jan-03 16-Jun-03 11-Feb-03 13-Mar-03 12-Dec-02 15-Apr-03 15-Jul-03 13-Aug-03 16-May-03 12-Sep-03 10-Oct-02

Innovative Product Launch Company is planning to launch a series of new products in the Indian replacement market, which accounts for 40% of total market. The company has successfully launched a new wheel-bearing kit for Maruti 800.In order to further increase it presence in the same segment, it is planning to introduce similar kits for Sumo Model.Simultaneously, it plans to offer imported wheel bearing kits, clutch release bearing kits, timing belt kits and other products from its groups overseas plant in Indian market. This move will prove instrumental in increasing its revenue share in the market for automobile spare parts. Debt Re-Structuring In order to retire high cost debt instruments, SKF Bearing made right issue in the FY01.This move resulted in significant reduction of interest burden. The debt/equity ratio for the company has decreased from 2.1:1 in 1999 to 0.5:1 in 2002, which is likely to reduce further. Secured redeemable non convertible debentures of Rs200mn were due to retire in August 2003.Capital restructuring resulting in reduction of interest cost burden is likely to improve the companys profitability.

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SECTOR RESEARCH

Valuation At the current price of Rs87, the stock is trading at P/E of 15x FY03E earnings of Rs5.7. We expect the company to exhibit better results, on account of its strong presence and implementation of growth strategies.

Financial Analysis
SKF Bearings has for the first time crossed the Rs4bn.The topline grew by 13.5% to Rs4.1mn,as against RS3.5bn in 2001.The net profits of the company has shown a remarkable growth of 128%. Net profits for the 2002 stood at Rs204.2mn against net profit of Rs89.2mn in 2001.Working capital of the company have significantly improved and huge focus is given on receivable front. The company increased its production capacity by 17% in 2002 (62mn Nos.) as compared to 2001 (53mn Nos.). EPS for 2002 stood at Rs4.5 against EPS of Rs2 in 2001. Sales for the H1 F12/03 stood at Rs2171mn as against Rs1995mn in H1 F12/02, an increase of 9%. Net profit after tax for the same period was at Rs112mn against Rs59.7mn for the corresponding period of 2002,a significant increase of 88%. The robust increase in the net profit recorded for H1 F12/03, is the result of increased volumes in the automotive and industrial sectors, as well as savings from the debt restructuring undertaken earlier. Net interest payments for H1 F12/03 stood at Rs17mn, down 48 % from Rs32.8mn in H1F12/02.
Financial Highlights
Period to H103 Rs mn (6) Sales 2171 Other income 139.8 Total income 2311.1 Expenditure (1961.1) Operating profit 350.0 Interest (33.4) Depreciation (131.8) PBT 184.8 Tax (59.3) PAT 125.5 Extraordinary items (13.4) APAT Financial Highlights 112.1 OPM (%) 9.7 Equity 452.6 EPS (Rs) 5.0 H102 (6) 1995 61.0 2056.0 (1739.4) 316.6 (66.5) (136.7) 113.4 (53.7) 59.7 0.0 59.7 25.5 452.6 2.6 Growth (%) 9 129.2 12.4 12.7 10.5 (49.8) (3.6) 63.0 10.4 110.2 (100.0) 87.8 (62.0) 0.0 87.8

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Indian Ball Bearing Industry : This Ball is on a Roll...

SECTOR RESEARCH
Period to Rs mn Sales Other income Total income Expenditure Operating profit Interest Depreciation PBT Tax PAT Extraordinary items APAT OPM (%) Equity EPS (Rs)
December ending Company

2001 2002 (12) (12) 3573 4057 148.0 141.3 3721.0 4198.5 (3210.4) (3485.0) 510.6 713.5 (203.2) (109.7) (331.6) (274.0) (24.2) 329.8 (12.9) (125.6) (37.1) 204.2 126.3 0.0 89.2 204.2 10.1 14.1 452.6 452.6 2.0 4.5

2003E 2004E (12) (12) 4463 4976 180.0 160.0 4642.9 5136.2 (3900.1) (4340.1) 742.9 796.1 (71.0) (40.0) (275.0) (280.0) 396.9 476.1 (127.0) (152.4) 269.9 323.8 (14.0) 0.0 255.9 323.8 12.6 12.8 452.6 452.6 5.7 7.2

Production Trends & Segmentwise Revenues

Production Bearings (Ball & Roller) Spares, Components & Accessories For Textile Machinery Sales Volumes Bearings (Ball & Roller) Spares, Components & Accessories For Textile Machinery Sales Value Bearing Accessories & Maintenance Products (Traded) Bearings (Ball & Roller) Spares, Components & Accessories For Textile Machinery Unit 000 000 Unit 000 000 Unit Rs.(Mn) Rs.(Mn) Rs.(Mn) 2000 56576 1961 2000 54039 1961 2000 9 3396 213 2001 52987 1559 2001 52634 1539 2001 60 3335 178 2002 62052 1318 2002 62586 1398 2002 56 3824 177

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Indian Ball Bearing Industry : This Ball is on a Roll...

NRB Bearings
SECTOR RESEARCH

Recommendation BUY CMP 52 week H/L Market Cap Rs 115 Rs 130/52 Rs 1.1bn

Incorporated in 1966,as Needle Roller Bearing Company in joint venture with Nadella, France.It the first company in India to manufacture Needle Roller bearings. The company renamed itself to NRB Bearings Ltd., in view of diversified range and types of bearings being manufactured. NRB manufactures over 600 different types of bearings at its plants located at Thane, Jalna, Waluj, Aurangabad and Hyderabad. In the needle roller bearing segment NRB Bearings commands market leadership with around 70% of market share and notable market share of 16% in the cylindrical roller bearings. The company has also taken up the manufacturing of ball and taper roller bearings.
Segment-Wise Share Ball & Roller Bearing 14%

Share Holding Pattern Promoters Institutional Investors Other Investors General Public

% 84.91 4.39 1.57 9.13

Cylindrical Roller Bearing 16%

Needle Roller Bearing 70%

Investment Rationale
Share Price Chart
250000 200000 150000 100000 50000 10-Oct-02 11-Nov-02 0 08-Jan-03 06-Mar-03 04-Jun-03 02-Jul-03 10-Dec-02 05-Feb-03 30-Jul-03 28-Aug-03 07-May-03 25-Sep-03 04-Apr-03 120 100 80 60 40 20 0

Diversified Product Range NRB has most diversified and specialized bearing and manufacturers almost all types of bearing. It is into manufacturing of needle roller bearings, spherical roller bearings, cylindrical roller bearings, tapered roller bearings, ball bearings, crank pins and wide inner ring bearings. The wide product range has confirmed it strong position in virtually each segment of the industry. This has resulted in NRB Bearings to achieve leadership in the Indian needle roller bearing markets with the market share of 70%. With a continual drive on tailoring bearings to meet specific needs, NRB has successfully developed customization and applications expertise as their strength. In tapered roller bearings and in ball bearings, NRB is focussing on manufacturing of specials for selected customers like Maruti, Sona Steering, Mahindra & Mahindra, Telco.It is also manufacturing ball bearings for two and three wheeler segments. Export Potential The company is eyeing on the export market. NRB expects the Share of exports to contribute 10% of total sales by 2004,which presently accounts for only 6% of total sales. NRB has already entered talks with some of the major OEMs. In this move, it has already started getting its facilities QS 9000 certified being prerequisite to supply to many markets. NRB is also exploring the possibility of tapping replacement market

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SECTOR RESEARCH

in Asian and European countries. It plans to develop new products to cater to the requirements of international market. Technical collaboration with Nadella, France will prove significant in achieving the export targets. At present Renault Vehicle Industries - France is sourcing components for its truck division from NRB. Eyeing penetration in replacement market The company is all set to garner higher share in replacement market. In order to increase its penetration in replacement market it is focusing on market development. The company is also increasing to expand its dealer network in the lucrative regions of semi-urban and rural market In order to increase the overall reach it is planning to set up country wide plan. These initiates will aid the company to increase its penetration in lucrative areas and margins being higher in case of replacement market will translate in higher margins. Valuation At the current price of Rs114, the stock is trading at P/E 8x FY04 of Rs14.2. We expect the company to show better results, on account its strong dominance in market and diversified product portfolio.

Financial Analysis
The net profits of the company grew 42% yoy to Rs130.1mn in FY03 as against Rs91.7mn in FY02 .The net sales of the company increased from Rs1284mn to Rs1454mn for the same period. Interest expenses have significantly decreased by 36%. The EPS increased from Rs9.5 in FY02 to Rs13.4 in FY03. The net profits of the company for Q1FY04 have increased from Rs22.5mn as compared to net profit of Rs49.1mn in Q1FY03.The bottom line of has increased by 19% from Rs381mn in FY02 to Rs321mn in FY03.The interest burden has dipped by 56.4% from Rs5.5mn in Q1FY04 to Rs2.4mn in Q1FY03.The EPS for the same period has significantly increased from Rs7.6 to Rs12.1.

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Indian Ball Bearing Industry : This Ball is on a Roll...

SECTOR RESEARCH

Financial Highlights
Period to Q1FY04 Rs mn (3) Sales 381 Other income 5.7 Total income 386.7 Expenditure (301.4) Operating profit 85.3 Interest (2.4) Depreciation (25.4) PBT 57.5 Tax (8.4) PAT 49.1 Extraordinary items (19.8) APAT 29.3 OPM (%) 20.9 Equity 96.9 EPS (Rs) 12.1 Period to Rs mn Sales Other income Total income Expenditure Operating profit Interest Depreciation PBT Tax PAT Extraordinary items APAT OPM (%) Equity EPS (Rs)
December ending Company

Q1FY03 (3) 321 5.5 326.5 (265.0) 61.5 (5.5) (23.5) 32.5 (10.0) 22.5 0.0 22.5 17.4 96.9 9.3 FY03 (12) 1454 27.6 1481.7 (1151.7) 330.0 (17.8) (103.7) 208.5 (78.4) 130.1 0.0 130.1 20.8 96.9 13.4

Growth % 19 3.6 18.4 13.7 38.7 (56.4) 8.1 76.9 (16.0) 118.2 (100.0) 30.2 FY04E 1730 22.0 1752.4 (1418.9) 333.5 (9.6) (105.0) 218.9 (81.0) 137.9 0.0 137.9 18.0 96.9 14.2 FY05E 2076 22.0 2098.5 (1702.7) 395.8 (9.0) (108.0) 278.8 (103.1) 175.6 0.0 175.6 18.0 96.9 18.1

FY02 (12) 1284 34.7 1318.7 (1051.4) 267.3 (27.8) (94.9) 144.6 (52.9) 91.7 0.0 91.7 18.1 96.9 9.5

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SECTOR RESEARCH

Production Trends & Segmentwise Revenues

Capacity Bearings (Ball & Roller) Components (Automobile) Electrical Steel Stamping And Laminates Loose Needle Rollers Needle Roller Brushes & Cages Production Bearings (Ball & Roller) Components (Automobile) Loose Needle Rollers Needle Roller Brushes & Cages Sales Volumes Bearings (Ball & Roller) Components (Automobile) Loose Needle Rollers Needle Roller Brushes & Cages Sales Value Bearings (Ball & Roller) Components (Automobile) Loose Needle Rollers Needle Roller Brushes & Cages Others Unit 000 000 MT 000 000 Unit 000 000 000 000 Unit 000 000 000 000 Unit Rs.(Mn) Rs.(Mn) Rs.(Mn) Rs.(Mn) Rs.(Mn) 2000 8025 1500 2001 10000 1500 2002 10500 2500 2003 10500 2500

500 500 2029120 2029120 32794 32794 2000 2001 6377 7110 1233 640 1223077 1174353 23554 21977 2000 6531 1126 589481 22777 2000 689 39 109 520 2001 6540 664 486525 20948 2001 717 24 91 496 25

500 500 2029120 2029120 35294 35294 2002 2003 7289 8230 1314 1674 1041570 1198754 23644 21299 2002 7310 1367 525232 22594 2002 785 54 100 536 1 2003 7835 1661 593815 20344 2003 878 83 110 605 1

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SECTOR RESEARCH

Annexure1
Basics of Bearing Bearing are used in the rotating parts of virtually every machine, the precision in dimensions form a key factor to the performance of the machines as whole. Rotation movement is an indispensable characteristic in utilizing mechanical power. It is critical component of any equipment that rotates. The automobile industry is the major user segment for bearings, followed by general engineering, heavy industries and railways. Bearings can be broadly classified into two segments: 1.Bimetals 2.Anti-friction Bearings. Bimetal bearings (also known as engine bearings) are primarily used in the engines of automobiles or machines. The bearings are meant to reduce the friction between the moving part of an engine crankshaft or camshaft and its associated support surface. Anti friction bearings includes ball bearing and roller bearing. Roller bearings can be further sub divided into Tapered Roller, Cylindrical Roller, Needle Roller, Thrust bearings and other special application bearings. The main component of an anti-friction bearing are the inner ring, the outer ring, the rolling elements, the cage and the seals.
Distrubution of Produc tion 6% 3%

7%

30 %

54 %

Ball Bearing Needle Roller

Taper Roller S pherical Roller

Cylindrical Roller

1.Tapered Roller Bearing

Tapered roller bearings consist of four interdependent components: the cone, or inner ring; the cup, or outer ring; the tapered rollers, or rolling elements; and the cage, or roller retainer. The taper angles allow the bearing to handle a combination of radial and thrust loads. The steeper the cup angle, the greater the ability of the bearing to handle thrust loads. Taper roller bearings accounts for of 30% to total production of bearings.

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Indian Ball Bearing Industry : This Ball is on a Roll...

SECTOR RESEARCH

2.Needle Roller Bearing Needle roller bearings comprise of special form of cylindrical roller bearings in which the rollers are of a very small diameter and comparatively long therefore, they have the advantage of a very small difference bet. These bearings are detachable and suitable for carrying only radial loads. It accounts for 7% of total production of bearings.

3.Ball Bearing In this type of Bearing the steel ball are used in cage. The different types of Ball bearings are Single row deep groove ball bearings, Double row deep groove ball, Bearings magneto type ball bearing, Angular contact ball bearing, Double row angular contact ball bearings, Double row self aligning ball bearings. Ball bearings market has highest production and accounts for 54% of total production of bearings.

4.Spherical Roller Bearing They are designed to manage high radial loads and perform consistently, even when marginal lubrication, contamination, extreme speeds and critical-application stress are present. Potential applications of SRB are seen in power generation, oil field, mining and aggregate processing wind turbines, gear drives rolling mills etc. accounts for 3% of total production of baerings, lowest in the industry.

5.Cylindrical Roller Bearing In this type of bearings, the rollers racetracks are essentially cylindrical, however they may be ground slightly curved in order to achieve small degree of flexibility. The rollers are guided between two lips on either the inner race or the outer race. Ball Bearings have a point contact on the races whereas all types of cylindrical roller bearings have a line contact. Due to line contact, the cylindrical roller bearings have very high radial load carrying capacity as compared to ball bearings of the same size. It accounts for 6% of total production of bearings.

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Indian Ball Bearing Industry : This Ball is on a Roll...

SECTOR RESEARCH

Annexure2 Manufacturing Process Step1 Rolled / Forged Rings are procured from the suppliers; after this the process of TURNING is provided by the outside vendors at the premises of the suppliers only, who are specialized in bearing races turning. Step2 Heat Treatment: Turned races are heat treated on salt bath furnaces for hardening and tempering. The process involves: Preheating>Hardening>Marquenching>Annealing (Tempering)>Washing Step3 Grinding 1.Rough Grinding of outer Dia and Bore 2.Grinding of End Surfaces 3.Finished Grinding of outer Dia and Bore 4.Rough Grinding of the Tracks 5.Finished Grinding of the Tracks 6.Superfinsihing Grinding of the Tracks Step4 Demagnetizing and cleaning Step 5 Inspection and Assembly All the components are again checked thoroughly in different specified checks and segregated for different tolerance levels. The assembly of the bearings consists of putting finish-graded rollers in the cage along with cone and closing with closing die in the press. The cup is separately put on the cone assembly. After this, the cone assembly and cup will be thoroughly washed in the washing machine by Kerosene by pressure jets and then dipped in anti rust preventive oil. Step 6 Packing: After the above steps, bearings are put in the pillow wrapping machine and puch packed and sealed, then will be put in the cartoon manually.

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