Valuations to premiumise, going ahead… SKF India ::ICICI Securities, link

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Valuations to premiumise, going ahead…
SKF India (SKF) has surprised positively on the margin front with 13.4%
operating margins in Q3CY14 (12.9% in 9MCY14) led by cost
rationalisation and better utilisation levels. We highlight that overall auto
sector volume growth is expected to recover to ~18% and 14%, in CY15E
and CY16E, respectively, led by a pick-up in the PV and CV segments.
Furthermore, we also expect industrial capex to recover meaningfully
from H2CY15E. These factors are expected to boost SKF both in terms of
revenue pick-up as well margin expansion led by operating leverage.
SKF - key beneficiary of auto and industrial recovery…
SKF, the largest Indian bearings manufacturer with ~28% market share, is
equally present across the industrial (46% of sales) and automotive
segments (54% of sales including exports). With the expected industrial
revival and uptick in auto demand, going ahead, SKF is well poised to
capture the opportunity given its strong balance sheet with cash flow
generation and scalability bandwidth. Going ahead, with the anticipated
recovery, we expect revenues to bounce back at 13.3% CAGR over CY13-
16E to | 3266 crore. Also, we expect margins to recover to 13.7% in
CY16E vs. 11.5% in CY13. These are expected to drive earnings growth at
a CAGR of 24% over CY13-16E.
Premium valuations driven by growth prospects, going ahead…
The expected pick-up in automotive volumes as well as industrial capex
recovery is now reflected in valuations also with Fag Bearings, SKF’s key
peer, now trading at a premium valuation of 25.4x CY16E earnings. Given
SKF’s leadership position in the bearing space, strong earnings growth
(24% CAGR in CY13-16E), healthy balance sheet with robust cash flow
generation (| 675 crore over CY14E-16E) and core RoEs in excess of 30%,
we believe SKF would be the key beneficiary of the automotive segment
pick-up as well as industrial capex recovery. Consequently, we now
assign a higher multiple of 26x (vs. 24x earlier) on CY16 earnings and
revise our target price to | 1568/share with a BUY recommendation.

LINK
http://content.icicidirect.com/mailimages/IDirect_SKFIndia_QC_Dec14.pdf