SKF India- ICICI Securities Fundamental Top Picks for 2015

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SKF India (SKFBEA) Target Price: | 1568 (18% upside)
• SKF India (SKF) is the leader in the Indian bearing market (pegged at
| 8000-8500 crore) with ~28% share. Known for deep groove ball
bearings (forming ~35% of revenues and ~45% market share), SKF is
equally present across the industrial (46% of sales) and automotive
segments (54% of sales including exports). With expected industrial
revival and an 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
• With the auto industry finally showing signs of recovery after nearly two
years of a demand slump, new launches and product refreshes are the
key, going ahead. SKF, being the largest bearings player in the industry,
commands scalability bandwidth coupled with a lean balance sheet and is
poised to capture the opportunity arising from the revival in demand in
the automotive segment. We expect SKF’s manufactured product (auto)
sales to exhibit ~14.6% CAGR over CY13-16E, in line with overall auto
growth assumptions
• Industrial bearings (46% of revenues) are sourced from the parent
(~90%) and SKF Technologies. We expect import substitution of
industrial bearings, through ramp up in SKF Technologies, to be a key
revenue driver for SKF’s revenues and margin expansion as SKF would
improve its turnaround time while the resultant cost saving would lead to
market share gains. Consequently, we expect industrial (traded goods)
sales to grow at 11.6% CAGR over CY13-16E with overall EBITDA
margins recovering to 13.7% in CY16E vs. 11.5% in CY13
• Given SKF’s leadership position in the bearing space, strong earnings
growth (CAGR of 24% in CY13-16E), healthy balance sheet with robust
cash flow generation (| 680 crore over CY14E-16E) and core RoEs in
excess of 30%, we ascribe a P/E multiple of 26x on CY16E EPS and a
target price of | 1568/share