FAG Bearings - Resilient In Difficult Times; Result Update Q4CY15 :: Edel

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FAG Bearings’ (FAG) Q4CY15 revenue growth of 3.6% came 3% below estimate, but EBIDTA spiked 46.6%. Key positives were: 1) robust 480bps expansion in gross margin to 42.7% led by better product mix,  softening raw materials and favourable currency  (imports); and 2) sales growth of 3.6% YoY (1% dip by SKF India) was led by pick up in automotive segment. Management highlighted that domestic business grew 8-9% YoY in CY15, driven by robust 13-14% growth in automotive segment (4W) that was ahead of industry, and 5-6% growth in industrial segment. Key negative was exports remained flat in CY15. For CY15, FAG reported 5.7% and 26.3% sales and EBIDTA growth (SKF reported flat revenue and 4.4% EBITDA growth), respectively. We estimate the company’s auto and industrial sales to gain from the cyclical uptick. Industrials would also reap strong structural benefits of localisation. We expect strong 19% earnings CAGR and RoCE expansion of 130bps to 26% over CY15-17. With scope for sales improvement (assumed 13% CAGR over CY15-17 versus 25-30% growth during CY10-11, when the cycle turned) and potential for margin improvement (19% in CY17E; peak cycle margin of ~20%).

Robust automotive drives growth

For Q4CY15, FAG reported sales growth of 3.6% YoY led by sales pick up in automotives segment. This compares to SKF India’s 1% YoY decline. FAG’s EBITDA jumped 46.6% YoY (up 26% YoY in CY15). Gross margin rose 480bps (SKF reported 160bps rise) to 42.7% and operating margin was up 600bps due to 11% dip in staff costs. For CY15, FAG reported 5.7% growth versus SKF’s flat numbers. For the year, the company reported 8-9% YoY domestic growth, whereas exports remained flat YoY. The automotive segment logged strong 13-14% YoY growth ahead of industry on market share gains. Industrial segment grew 5-6% following good traction in renewable and production machinery segments. Rail, power transmission and off highway segments were however, stagnant.

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