FAG Bearings – 4QCY2010 Result; Target Rs. 1,065:: Angel Broking

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 FAG Bearings – 4QCY2010 Result Update

Angel Broking maintains a Buy on FAG Bearings with a Target Price of Rs. 1,065.

FAG Bearings (FAG) reported healthy 4QCY2010 performance, in line with our

expectations. The company’s top line came in slightly below our estimates, while

the bottom line reported better-than-expected performance, led by strong

operating margin expansion and higher other income. We broadly maintain our

earnings estimates for FAG and continue to have a Buy rating on the stock.

Net sales up 21.4%, net profit jumps 105.2%: For 4QCY2010, net sales grew by

21.4% yoy (down 2.3% qoq) to `266.2cr, marginally below our expectation of

`279.6cr. Revenue performance was largely driven by a substantial jump in

volumes, aided by strong growth in overall auto volumes and the industrial

bearings segment. EBITDA margin expanded significantly by 721bp yoy (195bp

qoq) to 19.6%, basically due to the decline in raw-material cost and favourable

currency movement. As a result, the bottom line spiked by 105.2% yoy (7.3%

qoq) to `33.8cr. Further, higher other income and lower tax outgo aided in

reporting better-than-expected numbers on the bottom-line front. Hence, FAG

reported net profit margin of 12.7% (7.5%) for 4QCY2010.

Outlook and valuation: We believe robust demand in the auto and industrial

segments will aid FAG in registering a CAGR of ~15% in net sales and ~10% in

net profit over CY2010–12E. We broadly maintain our estimates for the

company. The stock is currently trading at 10.7x CY2011E and 9.8x CY2012E

earnings. We maintain our Buy rating on the stock with a Target Price of `1,065,

valuing the stock at 12x CY2012E earnings.

Top line up 21.4% yoy; slightly lower than estimates: FAG reported strong

21.4% yoy growth to `266.2cr (`219.3cr); slightly lower than our expectation of

`279.6cr. Revenue performance was largely driven by a substantial jump in

volumes, aided by strong growth in overall auto volumes and the industrial

bearings segment. On a sequential basis, however, the top line declined

marginally by 2.3%.

EBITDA margin at 19.6%: FAG’s EBITDA margin came in ahead of our estimates,

expanding significantly by 721bp yoy to 19.6% (v/s 18.9% estimated).

Raw-material cost declined by 105bp yoy and currency movement on the trading

side of the business helped in a 705bp decline in purchase of traded goods.

Overall, operating profit increased substantially by 91.8% yoy to `52.2cr (`27.2cr),

though marginally lower than our expectation by ~1%.

Bottom line up 105.2% yoy: Robust top-line growth and improvement in operating

performance resulted in impressive 105.2% yoy growth in net profit to `33.8cr

(`16.5cr). Moreover, higher other income and lower tax outgo aided in reporting

better-than-expected numbers on the bottom-line front. Sequentially, net profit

increased by 7.3% during the quarter.

Investment arguments

�� Second-largest player with ~15% market-share: FAG is India’s second-largest

player in the Indian bearing industry with a total market share of ~15%.

The company is also 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 the rolling element bearing segment and one of

the most prominent players in the industry. We believe robust demand in the

auto and industrial segments will aid FAG in registering a CAGR of ~15% in

net sales and ~10% in net profit over CY2010–12E.

�� Industry outlook encouraging: We believe there is likely to be an uptick in the

industrial segment in the next three–four quarters, driven by increased

demand from capital goods companies. Also, the auto segment is likely to

grow, driven by a ~13% CAGR in auto sector volumes. The company has a

strong customer base (such as Maruti, M&M, Tata Motors, GM, Ford and

Daimler Chrysler) in this segment.

�� Strong fundamentals and attractive valuation: FAG’s net asset turnover

remains high (over ~6x in CY2010E) due to largely depreciated assets.

The company’s strong business model enables it to record robust and

consistent RoCE of 30–32%. Cash flow generation is also expected to remain

healthy. On the valuation front, the stock is attractively priced relative to peers.

Outlook and valuation

We broadly maintain our estimates for the company. The stock is currently trading

at 10.7x CY2011E and 9.8x CY2012E EPS. We maintain our Buy rating on the

stock with a Target Price of `1,065, valuing the stock at 12x CY2012E earnings.

Key risks:

1) Lower demand and a substantial increase in steel prices could exert pressure on

margins and pose a downside risk to our estimates

2) Adverse currency movement can impact FAG’s trading business

3) Cheap imports from China could affect business of bearing players like FAG