SKF India: Is it an investment-worthy company? Here’s the analysis..
SKF India – Company Highlights:
SKF India: Market leader in bearings segment
Market View of SKF India Stock(10th Feb’11):
Current Stock Price: Rs. 517.95
52 Week-High Stock Price: Rs. 630
52 Week Low Stock Price: Rs. 318.20
Latest P/E: 16.64
Latest P/BV: 3.82
Tell me more about the SKF India Ltd.:
SKF (Svenska Kullager Fabriken) stands for Swedish Ball Bearing Factory. It is the Indian arm of the global major SKF Group which holds 54% stake in SKF India. SKF India has a strong business portfolio of 5 technology platforms i.e. Bearing (their core business accounting for 85-90% of revenues), Seals, Lubrication Systems, Services and Mechantronics. The company enjoys leadership position in terms of market share among the domestic organized sector. SKF supplies to the 2 major sectors of the Indian Bearings market i.e.
a) Industrial Sector serving industrial original equipment manufacturers (OEMs),
b) Automotive Sector serving automotive OEMs and aftermarket customers
Broadly, the company’s sales are divided into industrial bearing and automotive bearing in the ratio of 55:45. Also, nearly 60% of its sales are manufactured within India and the rest are imported and traded sales. SKF India has its manufacturing plants in Pune, Bangalore, and Haridwar. 90% of the company’s products are sold domestically whereas ~10% come from exports.
How has the financial performance of SKF India Ltd been?
Historical Financial Performance:
SKF India has performed well in its parameters in the last 10 years. Its performance was clearly hit by the economic recession in the last 2 years, but apart from this, its parameters have grown robustly. Its Net Sales has registered a 9 yr CAGR of 17.69% showing consistent demand for its products. The company has clocked good y-o-y growth rates in its EPS, but, for the last 2 years, where it witnessed de-growth. SKF India has had an impressive 6 year ROIC average of 28.22% indicating optimum management of funds by the company. SKF India is a debt free company which is remarkable. Hence, the 10 Year financial performance of SKF is Green (Very Good)
Why were the last 2 years disappointing?
The performance of the company in the last 2 years has not been good. Its Net Sales stagnated and its EPS witnessed de-growth in CY08 and CY09. This was mainly due to the economic recession which affected the automobile and the industrial sectors (major user-industries of bearings). The sharp drop in demand across the economy forced most industries to realign their production levels with the reduced demand levels. The economic recession affected the company till mid 2009 leading to lower profits in CY09.
CY (Calendar year from Jan to Dec)
Margin Trend over the years:
As seen in the above graph, SKF India’s operating and net profit margins have been erratic in the past. From CY01 to CY03, the company’s raw material costs were consistently around40% of sales, which helped the company grow its margins. But since then its raw material costs have shot up to a level of more than 65% of sales. Also, in the last 2 years the company witnessed de-growth in profit levels mainly due to the economic recession. This led to a fall in OPM from 16% to 10.38%. However, in the last 3 quarters the company has registered good profit growth, hence an improvement in margins can be expected.
What can we expect in the future? Here’s the analysis of SKF India Ltd..
In the Short-term:
The first 3 quarters of CY10 have been very good for SKF; it has registered robust y-o-y growth rates in every quarter. In the last quarter (Sept’10), it registered a robust 27.6% growth in Net Sales. Its Net Profit grew by 32% to Rs. 41.07 Cr. backed by a healthy top line growth. For the nine-month period ended September 30, 2010, the company’s net profit increased to Rs 133.10 Cr. from Rs 63.22 Cr. in the same period last year. Total income of the firm jumped to Rs 1,546.81 Cr. in the January-September period from Rs 1,115.37 Cr. in the same period last fiscal.
Looking at the 2 graphs above, we can see a clear increasing trend, both in the company’s Net Sales and TTM EPS over the last 6 quarters. The company recently, commenced operations at its third plant in Haridwar, Uttarakand to cater to automotive bearing demand. Backed by the surge in the automotive demand as well as a pick up in the business among industrial customers, the company is expecting its revenues to grow by 20-25% for CY10. Hence, we can expect the company to register good growth rates for CY10 and for the first half of CY11.
In the Long-term:
Capacity Expansion to meet future demand:
SKF has robust plans of expanding its capacity in order to meet the high demand of the automotive and industrial sector. It has set up a third plant at Haridwar in Uttarakhand with a capacity of 60 million units with an investment of Rs. 150 Cr. mainly to cater to the automotive sector. SKF India has tied up with Hero Honda for meeting all its bearing requirements for the next five years. Previously, the entire requirement was met from Bangalore facility, but now all the bearing requirements will be supplied from the Haridwar plant once it becomes operational. This plant is expected to achieve full capacity in two-and-a-half years and has become operational recently. Apart from the various tax concessions that the company will enjoy, Uttarakhand is poised to become a hub for automotive industries in future.
SKF India is also setting up another greenfield plant in Ahmedabad (in Gujarat). Twice the size of the Haridwar plant (investment of ~Rs. 270 Cr.), this plant will manufacture medium to large size bearings for rail, wind power and heavy industrial applications. A key customer for the Ahmedabad plant is Suzlon Energy; SKF has an exclusive five-year agreement to supply Suzlon with main shaft bearings and slewing ring bearings for Suzlon wind turbines.
Looking at the company’s robust expansion plans, we can expect a good growth in revenues in the long-term.
New Focus Areas to de-risk its business model:
SFK is now focusing on newer segments like aerospace industry, power transmission and wind energy plants, etc. It is looking to reduce its dependence on the bearing segments and will invest more on other areas like seals, linear motion products, etc. Currently, about 90% of its total revenues arise out of the bearing business. SKF is planning to expand its seals, lubricants, services and mechatronics business and make it constitute about 20% of the total revenues by 2011. This is mainly to de-risk its business model.
Strong Balance Sheet:
SKF India has a strong balance sheet and has been increasing its reserves consistently. It has a strong financial track record and has always maintained a positive cash flow from operations. Along with this, the company has always maintained its inventory days, debtors days and creditors cycle within limit. With no debt on its books, the company can expect a steady growth in its earnings, without any major distortions.
New Technology Center to help provide better service:
SKF started its `global testing centre` at Bangalore which will be a hub of testing activities to ensure greater focus on customer requirements, cost, quality and operational efficiency. The new testing centre is expected to reduce lead time for customers by responding speedily to their requirements by testing at close proximity to its customers for design and processes.
The Indian economy has strongly recovered and most estimates now indicate a good growth rate from 2010 onwards. The growth would be lead by the Auto industry. The automobile industry is the largest user segment for Indian bearing market accounting for almost 50-55% of total demand. All segments of automobile industry are expected to report strong growth in the coming year.
In the industrial segment the engineering sector is the largest user segment for Indian bearing market accounting for 28% of bearing sales. The manufacturing sector and capital goods have shown robust growth. The overall revival in industry and manufacturing will drive capital investments and spur growth in the engineering industry – the second largest customer for bearings industry. Exports of bearing companies have increased at a CAGR of 13% during the last 5 years. The domestic players are sensing the outsourcing opportunity and have initiated the process of producing a range of bearings for meeting the requirement of the parent or other global customers.
All these factors are sure to give further boost to the bearing industry.
Risks & Concerns:
a) Cheap spurious bearings have a prominent presence in the replacement market, which not only affects the revenues but also the pricing in the replacement market of SKF’s products.
b) Also, reduction in custom duty on imports may result in cheaper imported bearings. Cheaper imports are available from China and Eastern Europe which poses a threat to the Indian bearing manufacturers.
c) Rise in key raw material costs (steel and alloy steel) could adversely affect the margins.
Thus, we can conclude that robust expansion plans, newer areas of focus and strong growth expected in the automotive and industrial bearing segment will drive growth for the company. Hence looking at all the factors the long-term outlook of the company can be expected to be Green (Very Good).
So, is SKF India an investment- worthy stock?
The economy is expected to grow roughly by 5-7% in the next 5 years. This is likely to boost demand for bearings from the automotive and industrial sectors in India as well as increase exports. Considering the company’s expansion plans and new areas of focus, we can expect economic growth to have a positive impact on SKF’s earnings.
While SKF India is an investment worthy company, it is always best to invest in a company at an attrative valuation Currently, SKF India’s stock is trading at a price of Rs. 515. But, does this price offer an attractive discount to SKF India’s right value (MRP) or is it over-priced? It is always best to invest at an attractive discount to its MRP, to get maximum returns at minimum risk. Become a member of MoneyWorks4me.com to know its sensible buy- price and hence take the right action for this company. For the first time MoneyWorks4me has come out with a 30 day free trial. To avail of this click here. Offer expires on 28th Feb’11.
Disclaimer: This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations or needs of an individual client or a corporate/s or any entity/ies. The person should use his/her own judgment while taking investment decisions.