FAG Bearings - 1QCY2011 Result; Angel Broking maintains Neutral on FAG Bearings .

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 FAG Bearings - 1QCY2011  Result Update

            Angel Broking maintains Neutral on FAG Bearings .

For 1QCY2011, FAG Bearings (FAG) reported higher-than-expected results. The

company’s top line and bottom line reported impressive growth, led by strong

operating margin expansion and higher other income. We revise our revenue

and earnings estimates upwards to account for better-than-expected 1QCY2011

results. However, we recommend Neutral on the stock due to the recent run up

in the stock price.

Better-than-expected operating performance: For 1QCY2011, net sales grew by

robust 30.5% yoy and 16.3% qoq to `310cr, better than our expectation of

`276cr. Revenue performance was largely aided by a strong momentum in the

automotive and industrial bearing segments. EBITDA margin expanded

substantially by 521bp yoy and 58bp qoq to 20.5%, despite rising raw-material

pressures. This was basically due to the decrease in purchase of traded goods,

aided by favourable currency movement during the quarter. As a result,

net profit registered an impressive 90.8% yoy and 27.1% qoq increase to `43cr.

Further, higher-than-expected other income helped the company to register

robust growth in net profit.

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

segments will aid FAG in registering a CAGR of ~16% in net sales and ~12% in

net profit over CY2010–12E. We revise our revenue and earnings estimates

because of better-than-expected 1QCY2011 results. After the recent run up in

the stock price post strong 1QCY2011 results, FAG is trading at 14.3x CY2011E

and 13.1x CY2012E earnings. Thus, we recommend Neutral on the stock.

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 ~16% in

net sales and ~12% 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 ~11% CAGR in auto sector volumes over FY2011–13E. The

company has a strong customer base (such as Maruti, M&M, Tata Motors,

GM, Ford and Daimler Chrysler) in this segment.

􀂄 Strong fundamentals: FAG’s net asset turnover remains high (~7x in CY2010)

due to largely depreciated assets. The company’s strong business model

enables it to record robust and consistent RoCE of ~30%. Cash flow

generation is also expected to remain healthy.

Outlook and valuation

We believe healthy demand in the auto and industrial segments will aid FAG in

registering a CAGR of ~16% in net sales and ~12% in net profit over

CY2010–12E. We revise our revenue and earnings estimates on account of

better-than-expected 1QCY2011 results. After the recent run up in the stock price

post strong 1QCY2011 results, FAG is trading at 14.3x CY2011E and 13.1x

CY2012E earnings. Thus, we recommend Neutral on the stock.

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 such as

FAG