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FAG Bearing (CMP: `902/ TP: `1,035/ Upside: 15%)
FAG Bearing (FAG) is India’s second largest player in the Indian bearing industry
with a total market share of ~15%, and a market leader in the spherical roller
bearing segment with a market share of ~55%. FAG is a member of the Schaeffler
Group, Germany, a global leader in rolling element bearing segment and one of
the most prominent player in the industry. We believe that the robust demand in
the auto and industrial segments will aid FAG in registering a CAGR of ~17% in
net sales and ~30% in net profit over CY2009-12E.
We believe that there is likely to be a substantial uptick in the industrial segment in
the next three-four quarters driven by increase in demand from capital good
companies. Also auto segment is likely to grow driven by 12.3% CAGR in auto
sector volumes. The company has a strong customer base (Maruti, M&M, Tata
Motors, GM, Ford, Daimler Chrysler, etc.) in this segment.
The company’s net asset turnover remains high (over ~6x in CY2010E) due to
largely depreciated assets. Its strong business model enables it to record robust
and consistent RoCE in the range of 30-33%. Cash flow generation is also
expected to remain healthy. On the valuation front, the stock is attractively priced
at 10.4x CY2012E EPS vs. the peer average of 12x CY2012E EPS. We rollover to
CY2012E and recommend a Buy on the stock, with a Target Price of `1,035,
valuing the stock at 12x CY2012E earnings.
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