SKF India - Rising Utilisation To Drive Growth; Result Update Q3CY14 ::Edelweiss PDF link

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SKF India’s (SKF) Q3CY14 sales growth came in 4% below estimates, while EBITDA growth surpassed estimates by 4%. Key positives were: 1) industrial OEM posted 20% YoY growth in sales; 2) gross margin increased by 171bps YoY to 39.1%; and 3) operating margin expanded by 166bps YoY to 13.4%, aided by cost reduction measures. With the economy expected to turn-around, we expect SKF’s auto and industrial OEMs to be a strong beneficiary with current utilisation rates facilitating 0-25% higher production. Thus, we estimate the company’s CY14 and CY15 profits to rise by ~19% and ~33%, respectively; we introduce CY16 EPS and estimate it to log 20% growth. On better operating margins, healthy product mix (new products with better margins), improvement in RoE by 446bps over CY13-16E and rolling over to CY16E EPS, we upgrade the stock to ‘BUY’ with a revised TP of INR1,350 (INR1,175 earlier).

Industrial OEM drives sales growth

SKF reported revenue growth of 7% YoY, led by 20% and 6% YoY growth in industrial and auto OEM segments, respectively. Industrial and auto after-markets grew by 4% YoY each. Within automotives, growth was led by two-wheelers (2W) and tractors, while industrials growth was led by machine tools, renewable energy, railways, off highway and industrial drives. For 9mCY14 sales grew 7% YoY, with automotive sales growing by 4% YoY, industrial by 5-6% YoY and exports by 10% YoY.

Gross and EBIDTA margins extend expansion

The company’s operating profit jumped 22% YoY. Gross margin catapulted by 171bps YoY to 39.1%, while EBITDA margin improved by 166bps YoY and 71bps QoQ to 13.4% owing to cost cutting measures and better utilisation levels (up 10% YoY).

LINK

https://www.edelweiss.in/research/Banyan-Series--SKF-India--Rising-Utilisation-To-Drive-Growth;-Result-Update-Q3CY14/27358.html