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FAG Bearings India Analysis

March 16, 2007

FAG Bearings India is a 51.33% subsidiary of German major FAG Kulgelfishcer Georg Schafer AG. Net sales revenue jumped 29% to Rs 147.53 crore in the quarter ended December 2006. Operating profit margin (OPM) increased 30 basis points (bps) to 23.1%. Thus, operating profit (OP) was up 30% to Rs 34.03 crore. Profit after tax (PAT) before prior-period adjustments (PPA) rose 33% to Rs 20.54 crore.

Net sales surged 33% to Rs 550.73 crore in the year ended December 2006. OPM moved up 290 bps to 23%. Thus, OP soared 53% to Rs 126.83 crore. PAT before PPA zoomed 50% to Rs 74.85 crore.

FAG Bearings India has been growing consistently at an attractive rate. Over the last three years (FY 2003 to FY 2006), sales have grown at a CAGR of 27% and net profit at a CAGR of 48%. OPM improved every year, from 17.2% to 23% in this period. The return on capital employed (ROCE) at 42.5% (in FY 2005) is one of the highest in the manufacturing sector.

FAG Bearings India, manufacturer of ball bearings, cylindrical roller bearings and spherical roller bearings, is a leading supplier to the automotive industry, mechanical and electrical engineering industry, besides the Railways.

The customer list consists of leaders in their respective industries. In the automobile industry, FAG Bearings India’s clients are Maruti Udyog, Ashok Leyland, Bajaj Auto, Eicher Tractors, Ford India, General Motors, Hero India, Hyundai India, M&M, New Holland, Tata Motors, and TVS Motors. In the engineering industry, the buyers are ABB, Bhel, Bharat Bijlee, Crompton Greaves, and Siemens. In the machinery sector, the company supplies to LMW, HMT, and Textools. Elecon Engineering and Neyveli Lignite in the material-handling sector and Bhel and NTPC in the thermal power sector are also its clients. Besides, FAG Bearings has many customers in the electric fan, transmission product, steel, paper, construction machinery, pump and rolling mill sectors. It also caters to the Indian Railways.

FAG Bearings had planned a Rs 80-crore capex in calendar year (CY) 2006. It is understood that it has carried our capex as per plans. Full benefit of this capacity expansion will help it to sustain its healthy sales growth in FY 2007.

The recent launch of the diesel version of Swift will give significant additional volume to FAG Bearings India — the sole supplier of bearings to Maruti’s Swift. The company also has good export business (around 18% of sales). Exports had come to its rescue even when domestic growth had slowed down in the past.

The automotive industry, the main user of bearings, remains in high gear with most categories of vehicles registering robust year-on- year growth. With road and other infrastructure poised for accelerated development as well as penetration of personalised transport set to increase with rising disposable income, the potential of continued healthy growth for the automobile industry is considered good.

The increasing exports of automotive products from India and the sourcing policy of global majors have resulted in India developing into a manufacturing hub for auto component manufacturers. As a cost effective and quality supply source, FAG Bearings India is well positioned to benefit from this indirect exports also.

The demand from the Railways, another important market segment, and other user industries such as thermal power plants, transmission products, steel, paper, construction machinery, pumps, material handling is also expected to be buoyant.

In FY 0712, we expect FAG Bearings India to register sales and net profit of Rs 688.41 crore and Rs 96.01 crore, respectively. EPS works out to 57.8. At the current share price of Rs 587, PE stands at just 10.1.

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