Soft quarter; healthy prospects ahead!!! • SKF India ::ICICI Securities, report link

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Soft quarter; healthy prospects ahead!!! • SKF India (SKF) reported a disappointing quarter with lower topline and margins • The topline came in at | 615.4 crore (up 3% YoY), which was lower than our estimate of | 659 crore mainly on account of muted demand in auto volumes in Q4FY14 • The EBITDA margin, at 8.6% (our estimate: 13%), was lower owing to one-time hit of | 12 crore on employee cost on account of higher provision for pension liabilities due to lower discounting rate • Consequently, the PAT of | 40.9 crore (YoY decline of 15.5%) was lower than our estimate of | 60 crore • In terms of segmental contribution, auto, industrial, exports formed 43%, 51%, 6% of Q4CY14 revenue (43%, 49%, 8% in CY14), respectively Leading bearing manufacturer with equal presence in industrial & auto SKF is the leader in Indian bearing market (pegged at | 8000-8500 crore) with ~28% share. Known for deep groove ball bearings (forming ~35% of revenues, ~45% market share), SKF is equally present across the industrial (49% of sales) & automotive segments (51% of sales including exports). With 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 & scalability bandwidth. We expect revenues to grow at 15.6% CAGR in CY14-16E to | 3167 crore. SKF to be key beneficiary of automotive volumes recovery In CY14, the auto sector has shown signs of recovery with ~10.3% growth (mainly driven by two wheeler segment growth, up 12.9% YoY). We also expect CV to pick up, going ahead, given the expected pick-up in economic activity. 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 a revival in demand in the automotive segment. We expect SKF’s manufactured product (auto) sales to witness ~16.2% CAGR in CY14-16E, in line with overall auto growth assumptions. Industrial bearings – opening up of new avenues to boost revenues… 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. Furthermore, the company has also forayed into the railway freight segment, which has a market size of ~| 600 crore. Opening up of new avenues would also be a revenue driver, going ahead. Consequently, we expect industrial (traded goods) sales to grow at 11% CAGR in CY14-16E with overall EBITDA margins recovering to 13.7% in CY16E vs. 11.7% in CY14. Strong growth prospects ahead; maintain BUY… Given SKF’s leadership position in the bearing space, strong earnings growth (25% CAGR in CY14-16E), healthy balance sheet with robust cash flow generation (| 510 crore in CY14-16E) and core RoEs in excess of 30%, we believe SKF would be a key beneficiary of automotive segment pickup as well as industrial capex recovery. We maintain our BUY rating on the stock with a target price of | 1560 (valued at 26x CY16E EPS). We advise our clients to accumulate on any corrections, given the long term growth prospects.

LINK
 http://content.icicidirect.com/mailimages/IDirect_SKFIndia_Q4CY14.pdf