Bearings Sector 140221 Edelweiss Initiating Coverage FAG Bearing,SKF India,NRB Bearings,Timken India...
Transcript of Bearings Sector 140221 Edelweiss Initiating Coverage FAG Bearing,SKF India,NRB Bearings,Timken India...
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Edelweiss Securities LimitedShradha Sheth+91 22 6620 [email protected]
Manoj Bahety, CFA+91 22 6623 3362 [email protected]
Reconditioning, Product & Service Packages,
Failure Analysis, Calculation & O
ptimization,
Condition Monitoring, Mechatronics,
rT aining, Installation Consulting
Mounting Services
Production Process Know-How,
Application Knowledge
s e r i e sG r o w t h W i t h o u tM a i n t e n a n c e
BANYAN
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We are delighted to initiate Bearing sector under our mid-cap series, Banyan. Banyan signifies Growth Without
Maintenance and under the series we endeavour to present stocks not widely covered owing to low management access /
liquidity, but which possess robust long-term fundamentals and structural drivers. Considering the low management access
and long-term structural drivers, we will not release regular maintenance updates on the said stocks.
Our selection framework is differentiated in this series and not clouded by valuations alone. Some of the important
attributes of stocks under the series are:
1. Good corporate governance history
2. Healthy balance sheet with robust cash flows
3. May have low liquidity
4. Low or no management access
5. Not widely covered
6. Low institutional holding
Our latest initiation under the Banyan Series are SKF and FAG. The companies, by virtue of their dominance ~45% market
share in ball bearings segment for SKF and ~45% market share in the roller bearings segment for FAG, make them domestic
market leaders. A strong product portfolio with technology expertise make players like SKF and FAG preferred suppliers to
original equipment manufacturers (OEMs) right from the product development stage. The sector is highly diversified with
auto sector contributing 48% and industrial segment at 52% of overall sales. We perceive huge growth opportunity in
automotive segment as India becomes one of the major manufacturing hubs for global OEMs. Also, the healthy industrial
segment will reap benefits as imports get substituted with localised sales. Hence, with expected uptick in auto and
eventually industrial sectors, we expect SKF and FAG to register 26% and 31% CAGR in earnings over CY13-15E,
respectively. Companies have strong financial metrics: (1) high return ratios (average core RoCE of ~40%, core RoE of
~28%); and are (2) cash rich with net cash per shareSKF and FAG at INR105/share (17% of market cap) as on CY12 and
INR195/share (12% of market cap) as on CY13, respectively. We initiate coverage with BUY recommendations on SKF and
FAG with target prices of INR795 and INR2,022, implying upsides of 26% and 30%, respectively.
As always, we await your valuable feedback.
Regards
Nischal Maheshwari
Co-Head Institutional Equities & Head Research
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1 Edelweiss Securities Limited
Executive Summary
Executive summary We initiate coverage on Indias bearing industry with a
positive view. We expect an uptick in cyclical driversauto
and eventually industrial sectorover the medium term,
while the structural drivers are expected to look up over the
longer term with increasing localisation of industrial bearings,
which are currently imported (32-43% of sales). High level of
technology-based differentiation achieved by players in their
respective focus areas ensures strong positioning and low competitive
intensity. A strong product portfolio with technology expertise make players
like SKF and FAG preferred suppliers to original equipment manufacturers
(OEMs) right from the product development stage. Highly diversified profile
with auto sector contributing 48% and industrial segment at 52% of overall
sales. We perceive huge growth opportunity in automotive segment as India
becomes one of the major manufacturing hubs for global OEMs. Also, the
healthy industrial segment will reap benefits as imports get substituted with
localised sales. Hence, with expected uptick in auto and eventually industrial
sectors, we expect SKF and FAG to register 26% and 31% CAGR in earnings
over CY13-15E, respectively. We initiate coverage with BUY
recommendations on SKF and FAG with target prices of INR795 and INR2,022,
implying upsides of 26% and 30%, respectively.
Secular drivers: The Indian bearings industry is driven largely by the industrial sector (52%
contribution) and automobiles (48% contribution). SKF and FAG majorly import industrial
bearings from their parents. This is in the form of traded bearings, with SKF earning 43%
revenue and FAG 32% from this segment. Massive capital outlay is expected to drive
increasing localization, in turn propelling huge structural opportunity for the industry. This
will be predominantly led by declining lead times and immense cost benefits. We expect the
companies to pass on benefits of growing localisation, which could lead to market share
gains. Additionally, global auto majors making India a manufacturing hub offers
unprecedented growth opportunity.
Cyclical drivers: The automobile sector is a major driver for the bearings industry with
revenue contribution of ~48%. The uptrend in two-wheelers (2W) is eventually expected to
extend to passenger vehicles (PVs) and commercial vehicles (CVs) in the last leg. With
expected recovery in automobiles, SKF (derives ~58% OEM revenue from 2W segment) will
be a strong beneficiary. FAG will be a strong beneficiary of the uptick in PV and CV
segments, deriving ~44% and ~30% of its automotive OEM revenues from these segments,
respectively. The bearing companies have a diversified revenue mix with almost half (~52%)
coming from the industrial sector. With expected revival in IIP, the industrial bearings
segment is expected to post robust growth also led by improvement in key segments such
as railways, power and mining sectors.
Competitive advantage: SKF, FAG, Timken and NRB have carved a niche with dominant
positioning anchored by their strong product portfolios along with technology expertise. As
a result, these players have been able to partner with OEMs right from the product
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development stage. In India, SKF commands a formidable ~45% market share in ball
bearings segment and FAG commands a strong ~45% market share in the roller bearings
segment. Strong global parentage provides huge expertise and global processes to these
companies which new companies find difficult to replicate. Thus, their dominant position in
niche areas provides them high growth opportunity in their respective segments.
Comparison: SKF is the market leader with an overall ~28% revenue share driven by its
global parentage. FAG stands at No.2 with an overall revenue share of 17%. SKF has a
diversified business model (~45% of revenue from automotive segment, 49% from industrial
segment, 6% from exports). Also, overall SKF derives 47% revenue from the aftermarket,
which makes its revenue profile less cyclical. FAG derives 35% revenue from the automotive
segment, 51% from industrial segment and 14% from exports. Overall, it derives 30%
revenue from aftermarket.
Strong financial metrics: The industry has strong financial metrics: (1) high return ratios
(average core RoCE of ~40%, core RoE of ~28%); and (2) strong cash rich companies with net
cash per shareSKF and FAG at INR105/share (17% of market cap) as on CY12 and
INR195/share (12% of market cap) as on CY13, respectively. With robust cash flow
generation, we expect cash per share to be augmented by 1.88x over CY12-15E to
INR197/share in CY15E (31% of current market cap) for SKF and by 1.7x over CY13-15E to
INR339/share in CY15E (22% of current market cap) for FAG.
Strong investment case with long-term horizon: SKF and FAG will be strong beneficiaries of
the uptick in the 2W and 4W segments. This, in conjunction with a strong industrial
portfolio, will derive huge benefits of growing localisation. SKF and FAG are trading at 12.0x
and 12.3x CY15E EPS respectively, which is at a discount of up to ~15-19% to SKFs mean
historical valuations of 15x. We initiate coverage with BUY recommendations on SKF and
FAG valuing at 15x and 16x CY15E earnings, to arrive at the target prices of INR795 and
INR2,022, implying upside of 26% and 30%, respectively.
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Contents
Executive summary .................................................................................................................. 1
Contents ................................................................................................................................... 3
At a glance ................................................................................................................................ 4
India bearing industry: Overview ............................................................................................. 5
Evolution of domestic bearings industry.................................................................................. 8
Industry revenues and market share of players ...................................................................... 9
Industry drivers ...................................................................................................................... 14
Steady long-term financials.................................................................................................... 18
Global bearings industry ........................................................................................................ 26
Companies (Initiating Coverage)
FAG Bearings .......................................................................................................................... 29
SKF India ................................................................................................................................. 53
Companies (Unrated)
NRB Bearings .......................................................................................................................... 77
Timken India .......................................................................................................................... 81
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Indian bearing industry: Overview
The Indian bearings market accounts for less than 4% of the worlds bearing market. Major
organised players include international manufacturers like SKF, FAG and Timken, along with
several local manufacturers such as NEI, NRB, ABC and TATA.
Fig. 1: Domestic industry size (By Source) INR85bn
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Chart 2: User segments
Source: Industry, Edelweiss research
Around 48% of industry sales are to the automobile sector. Bearing companies also have a
diversified profile with substantial industrial business, which is majorly imported. Companies
distribute bearings across a variety of industrial applications27% of industrial sales are to
general engineering, 20% to heavy industries and balance to electrical equipment and
others.
Chart 3: Type of bearings: Revenue equally divided between ball and roller bearings
Source: Source: Industry, Edelweiss research
The bearings industry is majorly divided between ball bearings (48% of demand) and roller
bearings segments (52% of demand). Within roller bearings, tapered constitute half and
balance is catered by spherical, cylindrical and needle bearings.
Automotive
48%Industry
52%
Ball
bearings
48%
Roller
bearings
52%
Tapered
42%
Cylindrical
29%
Spherical
17%
Needle
9%
Thrust
3%
Automobile
48%
General
Engineering
27%
Heavy Ind.
(incl
Railways)
20%
Electrical
equip. &
others
5%
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Table 1: Competitive landscape
Source: Source: Industry, Edelweiss research
Low competitive intensity: While there is no technology barrier per se, there is a level of
technology-based differentiation achieved by players like SKF and FAG making them
preferred suppliers to OEMs. SKFs and FAGs century-long experience in bearing
manufacturing gives them the ability to engage with OEMs from product development stage
and add much more value than a commoditised component supplier. The top-three are
dominant players in different types of bearings and do not compete head on or on pricing.
Low customer concentration: No single customer constitutes more than 10% of SKFs, FAGs
or NRBs revenues.
Industrials catered by imports: Companies have a diversified mix with bearings for
industrial applications catered to by imports from parent.
Variable cost structure: SKF, FAG and Timken procure their raw materials semi-finished for
traded goods, in turn saving in capital investment and cushioning cyclical downturns. This
will change with increasing manufacturing from FAGs stable.
Type of bearingsDeep grove
ball bearing
Spherical Roller
bearings
Cylindrical roller
bearings
Needle roller
bearings
Tapered roller
bearings
Thrust roller
bearings
Industry size (INR 95 bn) 46 8 14 4 21 1
Application Wide use in two-
wheelers,
four-wheelers,
three-wheelers
(Used in wheel, axles)
Car suspension,
drive shaft,
heavy machinery
Machine tools,
transmission,wheel-
set bearings for
railway
applications
Niche application in
engine, gearbox.
With less load and
thrust.
Wide application
in commercial
vehicles
Transmission,
Alternators,
axles, Wheels,
Compressors, Pumps,
Gearboxes, Fans,
Electrical goods
Suspension,
Gear boxes
Casters
Heavy stationary
Industrial
conveyor
systems
Industrial fans
Cement & Coal
pulverize
Pumps Compressor
Gear boxes
Centrifuges
Mining Equipments
Transmission
Transmissions
Transfer cases
Engine and valve
trains
Steering and braking
systems
Axle supports
Outbound engines
Power tool copiers
Vehicle front
wheels
Differential and
pinion
configuration
Conveyor rolls
Machine tool
spindles
Trailer Wheels
Classifiers
Extruders
Oil well swivels
Pumps
Pulp refiners
Machine tools
Market share SKF - 45% FAG - 45% FAG - 45% NRB - 70% Timken - (40-45%)
Other players FAG
National
Engineers
Timken
SKF
National
Engineering
National
Engineering
SKF
NRB
INA Bearings
SKF
SKF
FAG
National Engineers
ABC Bearings
SKF
FAG
Timken
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Evolution of domestic bearings industry
Chart 4: Revenue growth healthy through cycles
Source: Industry, Company, Edelweiss research
Table 2: Domestic manufacturing outpacing industry
Source: Company, Edelweiss research
Import substitution and plateauing unorganised market
Increasing preference for quality products has resulted in the unorganised replacement
market shrinking in size over the years. The trend during CY09-12 highlights that the
organised market posted 18% CAGR versus the unorganised markets -17%. Increasing
preference for longevity of product life cycle, lower maintenance and better R&D efforts to
develop new products have led to growth of organised players. Bearings are majorly
imported for the range of products currently being manufactured in India. Going ahead
though, imports will steadily fall as new production facilities are commissioned by organised
players in India. Hence, we expect the organised players to post strong market share gains,
particularly as they pass on the cost benefits when they start manufacturing.
0
14,000
28,000
42,000
56,000
70,000
FY
19
99
FY
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00
FY
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FY
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FY
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(IN
R m
n)
SKF FAG NRB Timken NEI ABC
8% CAGR
20% CAGR
13% CAGR
Growth% CY09 CY10 CY11 CY12 CAGR (CY09-12)
Overall Bearings 5.3 33.3 6.3 - 12.3
Imports 15.5 33.3 6.3 (0.7) 12.1
Organised 4.0 42.3 16.2 - 18.3
Unorganised (18.9) - (46.4) 6.7 (17.0)
Healthy revenue growth through
the cycles barring last two years
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Industry revenues (CY12/FY13) and revenue market share of players
Chart 5: The top-5 players in organised bearing market account 79% of revenues
Source: Industry, Company, Edelweiss research
Note: Numbers of NEI, a CK Birla group company, are as of FY12.
Revenue contribution of top bearings company wise
SKF is a strong player in the ball bearings segment, whereas FAG is leader in roller bearings
and NRB leads in the more compact needle roller bearing segment. Break up for Timken
India is not available, though it is known that it is a major player in tapered roller bearings.
Chart 6: SKF IndiaMajor revenue contributors
Source: Company, Edelweiss research
0
5,000
10,000
15,000
20,000
25,000 S
KF
Ind
ia
FA
G B
ea
rin
gs
NE
I ltd
Tim
ke
n In
dia
NR
B B
ea
rin
gs
AB
C B
ea
rin
gs
(IN
R m
n)
Deep grove ball
bearings
35%
Tapered roller
bearings
18%
Othes
47%
Each player specialising in a
particular area ensures low
competitive intensity
SKF - A strong player in ball
bearings
SKF India
30%
FAG
Bearings
17%
NEI ltd
13%
NRB
Bearings
7%
Timken
India
8%
ABC
Bearings
2%
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Chart 7: FAG BearingsMajor revenue contributors
Source: Company, Edelweiss research
Chart 8: NRB BearingsMajor revenue contributors
Source: Company, Edelweiss research
Both FAG and SKF will be beneficiaries of the uptick in automotive and industrial segments
in India with substantial contribution from the above-mentioned segments. SKF on account
of having better distribution network will be a stronger beneficiary of replacement growth
in the industrial segment, as higher proportion of sales is from industrial replacements. NRB,
being a pure auto play, will majorly benefit from the cyclical upturn in the auto OEM
segment. NRB and FAG stand to gain from strong exports due to upsurge in the industry.
Cylindrical roller
bearings
35%
Spherical roller
bearings
25%
Othes
40%
Needle roller
bearings
58%Cylindrical roller
bearings
16%
Othes
26%
FAG - A strong player in roller
bearings
NRB - A strong player in niche
needle roller bearings
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Revenue mix
Fig.2: SKF India
Source: Company, Edelweiss research
Fig. 3: FAG Bearings
Fig. 4: NRB Bearings
Source: Company, Edelweiss research
Note: NRBs industrial division has been demerged into a different company (NBIL) since October
2012. However, NBIL contributed a mere 6% to NRBs revenue at INR347mn.
Revenue
(C 12- INR22bn)Y
Auto - 45% Industries - 49% Exports - 6%
OEM - 70% Replacement - 30% OEM - 33% Replacement - 67%
Revenue
(C 12- INR14bn)Y
Auto - 35% Industries - 51% Exports - 14%
OEM - 66% Replacement - 33% OEM - 65% Replacement - 35%
Revenue
(F 13- INR5.9bn)Y
Auto - 80% Exports - 22%
OEM - 82% Replacement - 18%
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Stable aftermarket (INR30bn segment)
Bearings have a service life of more than four years, post which they come up for
replacement. Nearly 35% of the industry contribution is from aftermarket making it an
INR30bn segment in terms of size. Bearing companies replacement market exposure helps
them mitigate the cyclicality risk of OEM downturns and provides a favourable pricing
environment.
Chart 9: Aftermarket segment a major contributor
SKF revenue mix: ~40% from aftermarket FAG revenue mix: ~30% from aftermarket
Source: Company, Edelweiss research
SKF and FAG derive ~47% and ~30% of their revenues from the aftermarket segment,
respectively. We expect the automotive aftermarket segment to remain stable. Going ahead,
both SKF and FAG are set clock 20% plus CAGR over CY13-15, led by the replacement cycle.
Distribution network
SKF has ~20,000 retailers and ~300 distributers across the automotive and industrial market.
FAG has 200 distributors whereas Timken has 87 distributors.
Competitive edge
Competitive intensity among organised players is low given that each player is dominant in
one of the product segments. SKF, FAG, Timken and NRB have etched strong position in
industry owing to strong product portfolio in their respective segments along with
technology prowess. As a result, these players have been able to partner with the OEMs
right from the product development stage. Going forward we expect the current positioning
to remain the same based on the following factors:
Increased investments by each continue to protect their turfs.
Also, strong parentage provides the technological edge in their respective segments.
Continual innovation will lead to market share gains. New products contribute 10% plus
of revenues for these players.
Thus, their dominant position in the niche areas has reduced the competitive pressures and
provided sustained growth opportunity for each player.
OEM
47%
Replaceme
nt
47%
Exports
6%
35% of overall revenues from
aftermarket reduces cyclicality
OEM
56%Replaceme
nt
30%
Exports
14%
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Table 3: Competitive advantage
Source: Company, Edelweiss research
Table 4: Technology collaboration of bearing players
Source: Company, Edelweiss research
Critical success factor for scoring SKF FAG
Distribution reach (nos.) High (300) Moderate (200)
OEM reach Moderate (47%) High (56%)
Replacement share (% of overall sales) High (47%) Moderate (30%)
Auto (% of overall sales) High (45%) Moderate (35%)
Industrial (% of overall sales) High (49%) High (41%)
Traded sales (% of overall sales) High (43%) Moderate (32%)
Exports (% of overall sales) Low (6%) Moderate (14%)
Imports (% of overall sales) High (26%) Moderate (21%)
SKF India SKF AB
FAG bearings Schaeffler Technologies AG
Timken India The Timken Company
NEI Ltd NTN Japan
NRB Bearings NADELLA GmbH
ABC Bearings NSK Japan
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Industry drivers
Automotive bearing drivers
Automobile sector is a major driver for the domestic bearings industry with a high ~48%
contribution.
Chart 10: Correlation between bearing and automotive industry revenues
There is a strong correlation between the automobile and bearings industry growth.
Chart 11: 2W industry uptick SKF a major beneficiary with 58% of auto OEM sales
Source: Industry, Edelweiss research
The 2W industry is estimated to register 9% volume CAGR over FY14-16, led by better rural
demand, good monsoons and pipeline of product launches by major OEM players like Bajaj
Auto and Honda Motorcycle and Scooter India. Additionally, more than 15 product launches
are expected across OEMs over the next 12-18 months. We expect SKF, which is a market
leader in 2W bearings (derives ~58% of auto bearings revenues) to be a strong beneficiary of
the burgeoning 2W segment.
(10.0)
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Bearing industry growth (%) Auto growth
(18.8)
(9.4)
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18.8
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2W % YoY
With ~58% of its OEM revenues
from 2W sales, SKF will be a
major beneficiary led by 10%
growth expected for industry in
FY16E
Strong correlation between
automotive and bearing industry
revenues with ~48% contribution
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15 Edelweiss Securities Limited
Chart 12: PV to bottom out soon FAG, major beneficiary with 44% of auto OEM sales
Source: Industry, Edelweiss research
PVs may witness back-ended growth in FY15, aided by robust growth in petrol vehicles,
improving rural demand and new product launches. Petrol vehicle sales are set to improve
due to the reducing gap between petrol and diesel prices. Over the next 18 months, ~16-17
new product launches are expected across the OEMs. We estimate PVs to register 9%
volume CAGR over FY14-16E, though more back ended with 12% growth expected in FY16E.
Chart 13: MHCV strong rebound in FY16E FAG, to benefit with ~30% auto OEM sales
Source: Industry, Edelweiss research
Post the uptick in 2W and PV segment, going by the historic trend the last leg of demand
uptick is expected in the CV industry. The CV industry is expected to uptick in 2HCY14 and
grow by 11% in FY15 and 23% in FY16 post a 19-20% dip in FY14E.
Despite the current lackluster environment, the OEMs are incurring large capex towards
R&D and product development.
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FY
14
E
FY
15
E
FY
16
E
(%)
(mn
)
PVs % YoY
(40.0)
(20.0)
0.0
20.0
40.0
60.0
0
80
160
240
320
400
FY
02
FY
03
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
E
FY
15
E
FY
16
E
(%)
(mn
)
MHCVs % YoY
With ~44% of its OEM revenues
from PV sales, FAG will be a
major beneficiary led by 12%
growth expected in PV volumes
in FY16E
-
Bearings
16
Edelweiss Securities Limited
Table 5: Capex plans of automobile companies
Source: Industry, Edelweiss research
We expect FAG to be a major beneficiary with uptick in 4W OEM industry and SKF a major
beneficiary led by uptick in 2W OEM industry growth over next 2-3 years.
Overall, post a sluggish CY13 we expect the auto bearings segment of the companies to post
12% growth in CY14 and 19% in CY15 in the OEM segment.
Industrial bearing drivers
Bearing companies have a diversified revenue mix with half the revenues (~52%) coming
from the manufacturing sector (excluding automobiles).
Chart 14: Correlation between bearings and IIP, CGFC and core manufacturing growth
Source: Industry, Edelweiss research
As can be seen there is a strong correlation between IIP, manufacturing GDP growth, gross
capital formation in the country and bearings industry growth.
Infrastructure expansion coupled with industrial growth will have a favourable impact on
the Indian bearings market.
Railways
The Indian Railways has earmarked an investment of INR5192bn (FY13-17) in the 12th
five
year plan. This is as compared to INR2012bn in the 11th
five year plan. This should positively
impact the bearings industry. In railways sector bearings are used in wheel axles, drive units,
traction motors, etc.
Capex (INR mn) FY12 FY13 FY14E FY15E
Ashok Leyland 6,753 7,659 2,500 2,500
Mahindra & Mahindra 14,195 12,362 11,000 11,000
Maruti 21,798 23,968 25,000 24,000
Tata Motors 30,802 29,000 25,000 25,000
Hero Motors 6,835 4,001 8,000 8,000
Bajaj Auto 3,000 3,000 3,000 3,000
(10.0)
0.0
10.0
20.0
30.0
40.0
FY
00
FY
01
FY
02
FY
03
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
(%)
Bearing industry growth (%) IIP
Demand to revive with improving
macros
Strong correlation between
industrial uptick and bearing
industry revenues with ~52%
contribution
-
Bearings
17 Edelweiss Securities Limited
Power
The Twelfth five-year plan targets an investment of INR15,017bn which envisages an
incremental capacity of 88,537MW. This is as compared to the 53,922MW addition in the
11th
plan which had an investment outlay of INR7,285bn. Investment in the renewal energy
segment is projected at a strong INR3,186bn as compared to INR892bn in the previous plan.
In power sector bearings are used in Pulverizers, bowl mills, pumps and material handling.
Mining
The mining industry may witness resurgence with 25-30 mines in Karnataka re-commencing
operations over the next one year. These mines have already secured their Reclamation and
Rehabilitation Plan and are awaiting other statutory approvals. Usage of bearings in Mines:
Shovels, draglines, haul trucks, loaders, crushing, screening and material handling.
While there could be some delays in fresh investments (as measured by GFCF),
manufacturing growth could recover post more clarity in the government policies after the
general elections. With uptick in GDP and IIP from 2HCY14, we expect the industrial bearings
segment to record 16% growth in CY14 and 25% growth in CY15 post de-growth of ~10% in
CY13.
Customs duty savings
As can be seen manufacturing of ball or roller bearings in India helps in 2.5% cost savings. As
a result with increasing localization by players we expect companies to have cost savings.
Table 6: Customs duty structure
Source: Industry
Ball/roller bearings (%) Pig iron (%)
Customs Basic Duty 7.5 Customs Basic Duty 5.0
Addl Duty CVD 12.0 Addl Duty CVD 12.0
Spl Addl Duty(Spl.CVD) 4.0 Spl Addl Duty(Spl.CVD) 4.0
Excise Cess 0.0 Excise Cess 0.0
Customs Cess 3.0 Customs Cess 3.0
-
Bearings
18
Edelweiss Securities Limited
Steady long-term financials
Revenue growth: SKF and FAG on secular uptrend
SKFs revenues posted healthy double-digits with 19% CAGR over the longer tenure (ten-
year term - CY02-12) in line with FAGs 19% CAGR. However, FAG has overtaken SKF in the
last five years, led by strong market share penetration. Going forward, with cyclical uptick in
industry, we expect growth to accelerate for both players.
Table 7: Sales CAGR over the years
Source: Company, Edelweiss research
Table 8: EBITDA CAGR over the years
Source: Company, Edelweiss research
Table 9: PAT CAGR over the years
Source: Company, Edelweiss research
Bearings industry has grown profitably over long term cycles. As can be seen, SKF and FAG
have registered 18% plus CAGR over ten years in sales and PAT as well as in past three years.
CY12
(INR mn)
1 year
growth (%)
3 year
CAGR (%)
5 year
CAGR (%)
8 year
CAGR (%)
10 year
CAGR (%)
SKF India 22,276 (8.5) 12.0 7.0 18.0 19.0
FAG Bearings 14,467 10.6 22.0 18.0 21.0 19.0
Timken India 6,885 (17.0) 30.0 15.0 12.0 16.0
NRB Bearings 5,916 6.0 19.0 12.0 13.0 14.0
CY12/FY13
(INR mn)
1 year
growth (%)
3 year
CAGR (%)
5 year
CAGR (%)
8 year
CAGR (%)
10 year
CAGR (%)
SKF India 2,584 (13.0) 13.6 - 14.0 16.0
FAG Bearings 2,209 (13.0) 29.0 11.0 20.0 17.0
Timken India 733 (31.0) 21.2 5.2 3.8 13.0
NRB Bearings 1,008 (12.0) 21.3 7.1 9.1 11.8
CY12/FY13
(INR mn)
1 year
growth (%)
3 year
CAGR (%)
5 year
CAGR (%)
8 year
CAGR (%)
10 year
CAGR (%)
SKF India 1,900.8 (8.8) 22.0 3.0 16.0 25.0
FAG Bearings 1,591.8 (9.5) 29.0 15.0 23.0 23.0
Timken India 442.4 (45.0) 11.0 3.0 4.0 14.0
NRB Bearings 480.4 (5.6) 30.0 7.0 7.0 14.0
FAG has consistently
outperformed peers across time
periods
-
Bearings
19 Edelweiss Securities Limited
Gross margins/ EBITDA margins
Chart 15: Gross margins Chart 16: EBITDA margins
Source: Company, Edelweiss research
SKFs and FAGs overall gross margins at 35-37%. This is despite higher contribution of
traded goods to overall sales. On manufactured basis, both generate ~50% gross margins.
SKF has traded goods contribution of 43%, FAG 32% and Timken 25% of overall gross sales.
NRB and NEI have majority manufactured goods. Also, FAG has averaged ~17% EBITDA
margin and SKF at ~12% in last 5 years despite having trading sales led by its product profile
and operational efficiency.
Return ratios
RoE of FAG and SKF looks suppressed owing to huge cash in balance sheet. Core average
RoE of FAG and SKF at 28-29% is higher than NRBs RoE of 18%.
Chart 17: RoE profile of bearings players
Source: Company, Edelweiss research
25.0
32.0
39.0
46.0
53.0
60.0
CY08 CY09 CY10 CY11 CY12
(%)
SKF India FAG Bearings
Timken India NRB Bearings
11.0
16.6
22.2
27.8
33.4
39.0
CY10 CY11 CY12
(%)
SKF India FAG Bearings NRB Bearings Timken India
Average gross margins of FAG
and SKF at ~36% despite having
high traded sales
Average core RoE of FAG and SKF
at ~29-31%
7.0
11.8
16.6
21.4
26.2
31.0
CY06 CY07 CY08 CY09 CY10 CY11 CY12
(%)
SKF India FAG Bearings
Timken India NRB Bearings
-
Bearings
20
Edelweiss Securities Limited
Table 10: SKF cash flow
Source: Company, Edelweiss research
Strong growth in operating cash flow and reduction in quantum of capex to lead to
improvement in free cash flow yield from CY14E.
Table 11: FAG cash flow
Source: Company, Edelweiss research
Higher growth along with better working capital management is expected to result in higher
operating cash flow and strong free cash yield over the next two years.
Table 12: NRB cash flow
Source: Company, Edelweiss research
Better working capital management will primarily drive NRBs operating cash flow in turn
leading to higher yield. While the company is financially leveraged, improvement in
operating cash flows will result in free cash flow.
Table 13: Timken cash flow
Source: Company, Edelweiss research
(mn) CY10 CY11 CY12 CY13E CY14E CY15E
Operating cash flow 1,159 1,509 1,989 1,543 2,336 2,881
Capex (922) (817) (807) (600) (500) (500)
Free cash flow 238 693 1,182 943 1,836 2,381
OCF yield (%) 3.5 4.5 5.9 4.6 7.0 8.6
FCF yield (%) 0.7 2.1 3.5 2.8 5.5 7.1
(mn) CY10 CY11 CY12 CY13E CY14E CY15E
Operating cash flow 1,320 826 1,371 2,050 3,023 3,454
Capex (194) (1,471) (1,407) (640) (1,100) (900)
Free cash flow 1,126 (645) (37) 1,410 1,923 2,554
OCF yield (%) 5.1 3.2 5.3 7.9 11.7 13.3
FCF yield (%) 4.3 (2.5) (0.1) 5.4 7.4 9.9
(mn) FY10 FY11 FY12 FY13
Operating Cash Flow 759 406 546 344
Capex (116) (358) (1,134) (936)
Free Cash Flow 643 48 (588) (592)
OCF yield (%) 43.5 11.6 15.6 9.9
FCF yield (%) 36.9 1.4 (16.9) (17.0)
(mn) CY10 CY11 FY12 FY13
Operating Cash Flow 584 384 341 131
Capex (81) (37) (443) (302)
Free Cash Flow 503 347 (102) (170)
OCF yield (%) 5.3 3.5 3.1 1.2
FCF yield (%) 4.6 3.1 (0.9) (1.5)
-
Bearings
21 Edelweiss Securities Limited
Working capital
SKF followed by FAG is best in terms of net cash conversion cycle at an average of 42 and 49
days, respectively. NRB has high credit period due to higher auto OEM sales vis--vis SKF and
FAG. This is also due to NRB being a pure auto player. Industrial bearings are typically cash
and carry on account of being sold through a distribution network.
Chart 18: Average receivable days
Source: Company, Edelweiss research
Chart 19: Average inventory days
Source: Company, Edelweiss research
20
40
60
80
100
120
SKF India FAG Bearings NRB Bearings Timken India
(No
of
da
ys)
CY10 CY11 CY12
20
65
110
155
200
245
SKF India FAG Bearings NRB Bearings Timken India
(No
of
da
ys)
CY10 CY11 CY12
SKF and FAG have demonstrated
strong working capital
management with average cash
conversion cycle at ~42-49 days
With a variable cost structure,
both SKF and FAG have lower
working capital cycle
-
Bearings
22
Edelweiss Securities Limited
Chart 20: Average payable days
Source: Company, Edelweiss research
Chart 21: Net cash conversion days
Source: Company, Edelweiss research
Asset turn
High FAT ratio and variable cost resulting in superior returns
On lower asset base, SKF, FAG and Timken have higher fixed asset turnover ratio (average of
2.4x). In fact, even the average core fixed asset turnover ratio (excluding traded revenues)
for FAG and SKF at an average 1.6x is higher than NRB at 1.1x. As a result, SKF and FAG have
strong return ratios (28% plus core RoEs and core RoCE of over 40%). With higher variable
cost structure, both SKF and FAG have lower working capital cycle of an average 42-49 days
as compared to ~190 days for NRB.
20
44
68
92
116
140
SKF India FAG Bearings NRB Bearings Timken India
(No
of
da
ys)
CY10 CY11 CY12
20
60
100
140
180
220
SKF India FAG Bearings NRB Bearings Timken India
(No
of
da
ys)
CY10 CY11 CY12
Also, industrial sales contribution
which is cash and carry, leads to
better credit period
With lower asset base, SKF and
FAG have higher fixed asset
turnover ratio; even core fixed
asset turnover ratio (excluding
traded revenues) is higher than
NRB
-
Bearings
23 Edelweiss Securities Limited
Chart 22: Strong core fixed asset turn for FAG, SKF, Timken
Source: Company, Edelweiss research
Capex
Capacity expansion is currently on-stream, with the companies preparing for next leg of
demand upswing.
Chart 23: Capital outlay
Source: Company, Edelweiss research
SKF incurred significant capex of INR2.5bn in the past three years at an average run-rate of
INR850mn per year, which is expected to taper off to INR1.6bn over CY13-15 or at an
average run-rate of INR500-600mn per year. Currently, the company has capacity utilisation
of ~65%, which it intends to increase going ahead.
FAG invested INR3.5bn in the past two years and proposes to further invest INR3.3bn over
the next few years. We have assumed INR2bn over next few years. We expect the company
to log strong growth on massive capacity expansion and on basis of operating at full capacity
in CY11.
0.0 0.5 1.0 1.5 2.0 2.5
CY10
CY11
CY12
(x)
Timken India NRB Bearings FAG Bearings SKF India
0
320
640
960
1,280
1,600
CY10 CY11 CY12 CY13E CY14E CY15E
(IN
R m
n)
SKF FAG
Strong growth on massive
expansion and utilisation; SKF
incurred INR2.5bn over CY10-12;
we have assumed further
INR1.6bn over CY13-15E; FAG
incurred INR3.5bn over CY11-13;
we have assumed further INR2bn
over CY14-15E
-
Bearings
24
Edelweiss Securities Limited
Exports
Exports contribution to revenues of the different companies is as follows: 6% of SKF, 14% of
FAG, 22% of NRB and 26% of Timkens revenues, as on CY12/FY13. The parent companies
source goods from their Indian subsidiaries (SKF India, FAG and Timken) to avail advantages
of low-cost operations. Exports have grown the fastest for NRB at 28% CAGR over CY07-12.
Over the mentioned period, SKFs registered exports at -2% CAGR, FAG at 18% CAGR and
Timken at 10% CAGR.
Chart 24: Export sales Chart 25: Exports as a % of sales
Source: Company, Edelweiss research
Imports
SKF, FAG and Timken import a sizeable portion of raw materials and finished goods. The
three Indian players primarily import industrial bearings from their parent company, which
complements their domestic production. Imports contribute 33-35% of both SKFs and
FAGs revenues, and 21% of Timkens revenues. As a result, their business model is asset
light and the cost structure is substantially variable, which helps during a downturn.
While SKF India manufactures industrial bearings on a small scale (6-7% of its industrial
sales), in CY10, subsidiary SKF Technologies started domestic manufacturing, for which SKF
will be a distributor. We believe increasing local manufacturing will help reduce the lead
time and costs. FAG manufactures industrial bearings to the extent of 18-19% of industrial
sales and started production of large size bearings at its Savli plant towards CY12 end. With
manufacturing operations in industrial segment expanding for both FAG and SKF (through
SKF Technologies) we expect imports to gradually decline over time.
216
679
1,143
1,606
2,070
2,533
CY07 CY08 CY09 CY10 CY11 CY12
(IN
R m
n)
SKF FAG NRB Timken
Exports a major contributor for
Timken and NRB at 26% and 22%
of revenues respectively; 14% of
FAGs sales and 6% of SKFs sales
0.0
10.0
20.0
30.0
40.0
50.0
CY07 CY08 CY09 CY10 CY11 CY12
(%)
SKF FAG NRB Timken
-
Bearings
25 Edelweiss Securities Limited
Chart 26: Imports
Source: Company, Edelweiss research
Chart 27: Imports as a % of sales
Source: Company, Edelweiss research
0
2,000
4,000
6,000
8,000
10,000
CY07 CY08 CY09 CY10 CY11 CY12
(IN
R m
n)
SKF FAG NRB Timken
0.0
10.0
20.0
30.0
40.0
50.0
CY07 CY08 CY09 CY10 CY11 CY12
(%)
SKF FAG NRB Timken
Increasing localisation to result in
declining imports over time
-
Bearings
26
Edelweiss Securities Limited
Global bearings industry: USD51bn in size
The global bearings market is estimated at over USD51bn in 2012, growing at 1-2% in local
currency. Asia is the largest bearings region with almost 50% of the total, having grown from
less than 30% ten years ago. Europe and Americas now account for less than 25% of the
world market. Chinas share of the worlds bearing market was slightly down to ~25%.
Japans share of the world bearing market has increased slightly, but the domestic Japanese
bearings demand still accounts for less than 15% of the world total. Other Asian markets
with sizeable bearing production and growth in recent years include India, Thailand,
Indonesia, Malaysia and the Republic of Korea. As per a market research report, the global
automotive bearings market is expected to post CAGR of 7.42% over 2014-18.
SKF is the global market leader in ball bearings with an estimated market share of ~20%,
followed by the Schaeffler Groups brands INA/FAG at ~18%, Timken (US) at ~12% and the
Japanese NSK and NTN at ~10% and ~7%, respectively. The top 3 Chinese producers hold 3%
of the global market, despite being in the largest region in terms of demand, which
highlights fragmentation levels of the Chinese bearings market.
The Asian bearings industry has
grown from 30% ten years ago to
~50% now; Europe and America
now account for less than 25% of
the world market
-
Bearings
27 Edelweiss Securities Limited
Definitions
Bearing is a machine element used to support load and reduce friction in moving parts. The
bearings industry is classified into: a) bimetal bearings; and b) antifriction bearings (includes
ball bearings and roller bearings). The rolling element acts as a differentiator in a bearing.
Roller bearings are named after the rollers shape, such as cylindrical roller bearings, needle
roller bearings, tapered roller bearings, spherical roller bearings and thrust roller bearings.
The choice of bearing primarily depends on revolutions per minute (RPM) and load.
Deep groove ball bearings are versatile, self-retaining bearings with solid outer rings, inner
rings and ball and cage assemblies. These products are of simple design, durable in
operation and easy to maintain; they are available in single and double row designs and in
open and sealed variants. These are generally less customised and available off the shelf.
Due to their low frictional torque, they are suitable for high speed RPM and medium load
requirements.
Cylindrical roller bearings are very rigid, can support high radial loads, and due to the cage,
are suitable for higher speeds than the full complement designs. Bearings with suffix E have
a larger roller set and are thus designed for extremely high load carrying capacity. The
bearings can be taken apart and can therefore be fitted and dismantled more easily. Both
bearing rings can therefore have an interference fit.
Spherical roller bearings are double row, self-retaining units comprising solid outer rings
with a concave raceway, solid inner rings and barrel rollers with cages.
Needle roller bearings come with cylindrical rollers that are small in diameter. Needle roller
bearings are used in medium RPM, high-load requirements compared to ball bearings,
which are used in high RPM, medium-load requirements.
Tapered roller bearings comprise solid inner and outer rings with tapered raceways and
tapered rollers with cages. The bearings are not self-retaining. As a result, the inner ring
together with the rollers and cage can be fitted separately from the outer ring. Tapered
roller bearings can support axial loads from one direction as well as high radial loads.
-
Bearings
28
Edelweiss Securities Limited
THIS PAGE IS INTENTIONALLY LEFT BLANK
-
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL , Thomson First Call, Reuters and Factset.
Edelweiss Securities Limited
FAG Bearings (FAG) is Indias second largest bearing company, with an
overall and roller bearings market share of ~17% and 45%, respectively.
In the past five years, the company has outpaced industry with 18% sales
CAGR, 15% operating margin, average core RoCE of 48% and 23% RoE.
High exposure to passenger vehicles (~45% of auto OEM sales) will drive
FAGs revenues. Considering significant ramp up in manufacturing
capacity (2.1x in gross block over CY10-15), the company is well placed to
capitalise on structural opportunity of India becoming one of the major
manufacturing hubs of global OEMs as well as localisation of industrial
sales. Parents (Schaeffler Group) sharpening focus on India and higher
localisation will be catalysts of strong sales growth and margin
expansion. Hence, we initiate coverage with BUY.
Huge capital outlay to drive growth and margin
With gross block expected to catapult 2.1x over CY10-15E, we have assumed 21% CAGR
in manufacturing sales over CY13-15. Also, FAG is localising industrial production of large
size bearings. With increasing capacity utilisation and gradual lowering of trading sales
(by 400bps over CY12-15E to 27.8% of sales), we expect gross and operating margins to
catapult 67bps and 203bps to 37.9% and 14.9%, respectively, over CY13-15E.
Mission India: Double share in parents turnover; exports hub
Indian operations currently contribute less than 4% to the group's annual turnover;
with expansion in portfolio and capacity (augmenting gross block by 2.1x over CY10-
15E) and the R&D set up, the parent aims to increase India contribution to ~8-10%.
This is in line with its strategy of not only tapping the growing domestic market, but
also using India as a significant hub for exports to the US, Europe and Asia.
Outlook and valuations: Robust bearing; initiate with BUY
We estimate FAGs earnings to surge 31% and 32% in CY14 and CY15, respectively,
post (-24%) in CY13. This growth will be led by robust rise in manufacturing sales post
capacity addition in auto as well as industrial division. The stock is trading at 16.3x and
12.3x CY14E and CY15E P/E, respectively, closer to mid band of its historical valuation.
We initiate coverage with BUY and target price of INR2,022, valuing the company at
16x CY15E earnings, implying 30% upside from current level.
INITIATING COVERAGE
FAG BEARINGS Growth uninterrupted
EDELWEISS RATINGS
Absolute Rating BUY
Investment Characteristics Growth
MARKET DATA (R: FAGB.BO, B: FAG IN)
CMP : INR 1,600
Target Price : INR 2,022
52-week range (INR) : 1,679/1,100
Share in issue (mn) : 16.6
M cap (INR bn/USD mn) : 27 / 427
Avg. Daily Vol. BSE/NSE (000) : 5.2
SHARE HOLDING PATTERN (%)
Current Q1FY14 Q4FY13
Promoters *
51.3 51.3 51.3
MF's, FI's & BKs 18.6 16.6 16.6
FII's 15.0 15.9 16.0
Others 15.2 16.2 16.1
* Promoters pledged shares
(% of share in issue)
: NIL
PRICE PERFORMANCE (%)
Sensex Stock Stock over
Sensex
1 month (2.8) (4.5) (1.7)
3 months (1.9) 13.7 15.6
12 months 4.9 182.5 177.5
Shradha Sheth
+91 22 6623 3308
Manoj Bahety, CFA
+91 22 6623 3362
India Equity Research| Bearings
February 19, 2014
(Click on image
to view video)
Financials
Year to December CY12 CY13 CY14E CY15E
Net revenues (INR mn) 14,467 14,300 16,764 20,343
EBITDA (INR mn) 2,204 1,836 2,319 3,024
Core profit (INR mn) 1,592 1,218 1,591 2,100
Diluted shares (mn) 17 17 17 17
EPS (INR) 95.8 73.3 95.8 126.3
P/E (x) 16.3 21.3 16.3 12.3
EV/EBITDA (x) 10.2 11.7 8.8 6.3
ROAE (%) 19.8 13.1 15.0 17.1
-
Bearings
30
Edelweiss Securities Limited
Investment Rationale
Market leader in less competitive roller bearings
FAG is part of the Schaeffler Group, the second largest player in bearings and worlds
leading manufacturer of roller bearings and linear products. In India, the company
commands an overall market share of ~17% with leadership in the roller (spherical and
cylindrical) bearings segments with ~45% share. In the spherical roller bearing segment, it is
the market leader with around 56% share. The company also has substantial market shares
of around 35% and 19% in the cylindrical roller bearings and ball bearings segments,
respectively. Roller bearings face little less counterfeiting than deep groove ball bearings.
This enables FAG enjoy superior margin in roller bearings in the aftermarket compared to
other products.
Strong consistent performance outpacing industry historically
Historically, FAG has grown consistently and outpaced peers on growth and margin front,
owing to its extensive exposure to the high-growth PV industry. Over the past five years, the
company posted strong 18% CAGR in sales and 15% CAGR in PAT.
Table 1: Performance through the cycles
Source: Company
Note: For 3 years, 5 years, 8 years and 10 years we have taken CY12 base to make it comparable
since SKF has yet not declared results
Strong automotive relationships, high exposure to passenger vehicles
to drive growth
FAG derives 35% revenue from automotive segment, of which 66% is OEM. By virtue of the
companys high exposure to four-wheelers in the OEM segment (~44% and 30% in PVs and
CVs, respectively) we expect its auto (OEM) bearings segment revenue to post 15% CAGR.
Our optimism is underpinned by the pent up demand, improving rural demand riding a good
monsoon and new product launches (16-17 product offerings scheduled by OEMs over the
next 18 months).
Also, FAG globally derives 69% of its overall revenue from the automotive segment. Ergo,
the company is the preferred bearing systems supplier to worlds leading manufacturers of
cars and trucks like GM, Ford, Volkswagen, Volvo and Daimler Chrysler, to name a few.
Almost all these players are looking to enhance their presence in India. This gives FAG a
competitive edge over peers in the supply of bearings to these OEMs in India.
1 year 3 year 5 year 8 year 10 year
growth CAGR (%) CAGR (%) CAGR (%) CAGR (%)
Sales 14,300 (1) 22 18 21 19
EBITDA 1,836 (17) 35 11 20 17
PAT 1,218 (23) 34 15 23 23
CY13 (INR mn)
Strong product positioning in
roller bearings with 45% market
share and overall 15% market
share
India, a strong focus area for
parent, with vision to take its
contribution to global turnover
to 8-10% from ~3% currently
-
FAG Bearings
31
Edelweiss Securities Limited
Chart 1: Uptick in Passenger vehicles industry on pent up demand from FY15E
Source: Industry, Edelweiss research
Table 2: New product launches over next 1-2 years
Source: Industry, Edelweiss research
(8.0)
0.0
8.0
16.0
24.0
32.0
0.0
0.7
1.4
2.1
2.8
3.5
FY
02
FY
03
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
E
FY
15
E
FY
16
E
(%)
(mn
)
PVs % YoY
Company Brand Segment Timeline Remarks
Nissan Datsun Go Compact Q1FY15 On Micra platform; Compete with Alto, Eon etc
Datsun Go Plus MPV FY15 Compete with Ertiga
Datsun Go Sedan Sedan FY15 On Go platform
Micra Compact FY16 Refresh; based on modular CMF-A platform
Renault Lodgy MPV FY16 Compete with Ertiga/Innova
Hyundai Xcent Compact Sedan Q1FY15 Compete with Dzire
GC Compact SUV FY16 i20 Platform; Sub 4m
Honda Mobilio MPV Q3FY15 based on Brio platform; Compete with Ertiga
new Jazz Premium Compact Q3FY15 Known as Fit in Japan;
Honda Vezel Compact SUV FY16 mini CRV looking; Petrol/Diesel engines from City/Amaze
Maruti Celerio Compact Feb-14 First with AMT Technology
Ciaz Premium Sedan FY15 end New SX4; Compete with City/Verna
SX4 S-Cross Crossover FY15 SX4 Crossover; Compete with XUV, Duster
Y9T LCV FY16 First LCV with 800cc diesel engine
YBA Compact SUV FY16 Sub 4m; Built for India; Rivals Ecosport
Tata Motors Bolt Compact Q2FY15 Based on Vista platform; to replace Vista
Zest Sedan Q2FY15 Based on Manza platform; to replace Manza
Nexxon Compact SUV
M&M S-101 Compact SUV FY16 Sub 4m; Price 4L; Monocoque construction
Ford Figo sedan Compact Sedan FY15 Compete with Dzire
New Fiesta Sedan FY15 Fiesta refresh
VW Taigun Compact SUV FY17 Compete with Ecosport
Fiat Avventura Compact SUV H2FY15 Compete with Ecosport
GM Adra Compact SUV FY17
Toyota Etios Cross Crossover Q1FY15
Expected uptick in its key OEM
segment 4W (PV+CV) accounts
for ~75% of its overall auto OEM
sales - we expect automotive sales
to log 19% CAGR over CY13-15E
-
Bearings
32
Edelweiss Securities Limited
Table 3: Capex plans of players (INR m)
Source: Industry, Edelweiss research
Huge capex for automotive, as well localisation of industrial bearings to
drive growth
Led by ~135% capacity utilisation in CY10 in the manufacturing segment, FAG undertook
huge capex of INR3.5bn in the past three years to gear for growth. As a result, the company
enhanced capacity towards advanced generation three-wheel bearing cell and
technologically superior X-life cylindrical and spherical roller bearing production at its
existing plant at Vadodara. Also, in October 2012, it commissioned a new plant at Savli (near
Vadodara) for manufacturing low friction ball bearings and large-size bearings. Savli plant
has a capacity of 36mn ball bearings units per year and 12,000 pieces per year of large scale
bearings. Currently, FAG primarily imports industrial bearings (traded) from the parent
company. It derives 51% revenue from industrial bearings, of which while ~32% is from
trading, 19% is out of manufacturing. In line with its long-term strategy to invest in
qualitative growth, FAG has started further localising industrial production of large-size
bearings.
We expect a significant benefit with increase in India-made industrial bearings post the
planned expansion as it will reduce lead time and cut costs by way of lower manufacturing
costs and substitution of advalorem import duties.
We anticipate the massive capacity expansion of INR3.5bn (85% expansion on CY10 gross
block) to significantly boost growth. Further, capex of INR2bn (28% expansion on CY13 gross
block) is estimated over CY14-15. As a result, overall gross block will catapult 2.1x over
CY10-15E. We have assumed incremental manufacturing sales of INR5.7bn over CY11-15E,
on this overall capex of INR5.5bn over CY11-15E, a fixed asset turn of 1x. The company has
historically generated average core fixed asset turn of 1.8x. We have assumed 21% CAGR in
manufacturing sales over CY13-15E versus 15% CAGR in past five years.
Capex FY12 FY13 FY14E FY15E
Ashok Leyland 6,753 7,659 2,500 2,500
Mahindra & Mahindra 14,195 12,362 11,000 11,000
Maruti 21,798 23,968 25,000 24,000
Tata Motors 30,802 29,000 25,000 25,000
Capital outlay of INR3.5bn in past
three years; further capex of
INR3.3bn planned over next few
years; we have assumed INR 2bn
over next two years
Fag has generated fixed asset
turnover of 1.8X historically
Strong automotive relationships
with ~44% of OEM revenues
from passenger vehicles and
~30% from commercial vehicles
-
33
Edelweiss Securities Limited
FAG Bearings
Chart 2: More than doubling of gross block over CY10-15E
Source: Company, Edelweiss research
The Savli plant is expected to reduce dependence on trading sales over time. Contribution of
trading sales is expected to dip from 31.8% in CY12 to 27.6% in CY15E and stimulate
profitability.
Chart 3: Increasing manufacturing sales trajectory
Source: Company, Edelweiss research
1.0
1.4
1.8
2.2
2.6
3.0
3,200
4,400
5,600
6,800
8,000
9,200
CY09 CY10 CY11 CY12 CY13 CY14E CY15E
(X)
(IN
R m
n)
Gross block Asset turn
(15.0)
(3.6)
7.8
19.2
30.6
42.0
1,330
2,510
3,690
4,870
6,050
7,230
CY07 CY08 CY09 CY10 CY11 CY12 CY13E CY14E CY15E
(%)
(IN
R m
n)
Traded bearings % Growth % of sales
Significant capex outlay (gross
block doubling over CY10-15) is
in line with parents vision to
double Indias contribution
Third generation
wheel bearing
plant commissioned
at Vadodara in 2011
Strong capex and automotive and
industrial uptick to lead to 21%
CAGR in manufacturing sales over
CY13-15E
-
Miscellaneous
34
Edelweiss Securities Limited
Chart 4: Trading sales to gradually moderate
Source: Company, Edelweiss research
Lower traded sales, higher capacity utilisation to boost margin
FAGs overall gross margin stood at ~37% in CY12. Its manufacturing margin stood at ~49%
and traded margin at ~15% in CY12. In the latter, the company fetches only distribution
margin, which suppresses overall margin. Traded goods, which contribute 32% to overall
sales, are mostly imported from parent group company (Schaeffler Tech. AG, Germany). The
company has generated an overall average EBITDA margin of 17% in the past five years.
With increasing capacity utilisation and lower traded sales (import substitution) we expect
improvement in gross margin and operating margin by 67bps and 203bps to 37.9% and
14.9%, respectively, over CY13-15E. Ergo, we expect 28% CAGR in operating profit over
CY13-15E.
Chart 5: Superior EBITDA margins, set to further improve
Source: Company, Edelweiss research
(15.0)
(3.6)
7.8
19.2
30.6
42.0
1,330
2,510
3,690
4,870
6,050
7,230
CY07 CY08 CY09 CY10 CY11 CY12 CY13E CY14E CY15E
(%)
(IN
R m
n)
Traded bearings % Growth % of sales
10.0
13.0
16.0
19.0
22.0
25.0
29.0
33.0
37.0
41.0
45.0
49.0
CY08 CY09 CY10 CY11 CY12 CY13 CY14E CY15E
(%)
(%)
Gross margin (%) EBITDA margin (%)
Increasing manufacturing
capacity to reduce trading sales
contribution by 400bps over
CY12-15E to 27.8%
Increasing manufacturing sales
and operating leverage to lead to
gross and operating margins
surging 67bps and 203bps over
CY13-15E to 37.9% and 14.9%,
respectively
-
35
Edelweiss Securities Limited
FAG Bearings
Parent envisions higher contribution from India; make it exports hub
India to account for ~8-10% of global market turnover over next few years
Schaefflers India vision is to reach EUR1bn in sales in 2020, implying 15% plus CAGR over
the next eight years (from sales of ~EUR0.3bn in CY12 for the group).
India to be exports hub to US, Europe, Asia: The Indian operation currently contributes less
than 4% to the group's annual turnover. However, with the expanding portfolio, capacity
and the R&D set up, the companys share will more than double. India will contribute more
than 8-10% to the groups global turnover as the company intends to tap not only the
growing domestic market, but also use India as a significant hub for exports to the US,
Europe and Asia.
Strengthening R&D to retain innovation edge: Banking on a strong global R&D network, the
parent intends to considerably strengthen innovation capabilities in Asia Pacific, to cater to
the regions customers. India, which is the centre of R&D excellence for the group's
motorcycle and tractor business, is expected to play a larger R&D role in other areas of
automotive and engineering businesses going ahead. FAG will invest close to INR500mn on
R&D for the group, and will be doubling the number of engineers to 400 in the next couple
of years. Globally, the Groups target is to maintain pole position in patent applications by
innovating continuously and maintaining R&D expense at 5% of annual sales. In CY12,
Schaefflers R&D expenses surged 19.8 % to EUR593mn (CY11: EUR495mn) or 5.3% of
revenue (CY11: 4.6 %).
Augmenting investments: Schaefflers target is to further expand the local production
network. In the groups global scheme of things, Asia Pacific is one of the key regions where it
envisages robust growth and sales over the long term. Hence, the group has chalked out plans
to invest around EUR300mn in Asia, of which EUR154mn will be invested in India over the next
few years. We assume half of this capex has already been met. The Schaeffler Group opened
new plants in India, Thailand and China, consistently implementing its in the region, for the
region strategy. FAG currently operates 13 production sites (out of total 70) in the Asia Pacific
region and more than half of the production is planned in the high growth Asia region.
Table 4: Planned greenfield sites and plant extensions for 2012-2014: Customer
proximity In the region, for the region strategy
Source: Company, Edelweiss research
Particulars
Savli, India
Pune, India
Hosur, India
Irapuato, Mexico
Kysuce, Slovakia
Skalica, Slovakia
Szombathely, Hungary
Brasov, Romania
Nanjing, China
Yinchuan, China
Taicang 5, China
Taicang 6, China
Suzhou, China
BienHoa City, Vietnam
Schaefflers India vision: EUR1bn
in sales in 2020 from ~EUR0.3bn
in CY12; more than 15% CAGR
Plans afoot to make India
significant hub for exports to US,
Europe and Asia
-
Miscellaneous
36
Edelweiss Securities Limited
Focusing capital expenditure on growth regions such as India, China, and Russia is part of
the Schaeffler Groups strategy to protect its competitive edge and leading position in the
market. This will help the company to continue surpassing the market growth.
New product pipeline to spur growth
FAG was successful in adding over 100 new products to its portfolio in 2012. The company
will invest close to INR500mn on R&D for the group in India, and will double the number of
engineers to 400 over the next couple of years.
FAG Double-Row Angular Contact Bearings X-life
Double row angular contact ball bearings of X-life quality offer a longer operating life,
especially in use under axial load conditions.
They are therefore particularly suitable for use in pumps and agricultural machinery, for
applications in conveying equipment and packaging equipment, elevators and compressors.
FAG Spherical Roller Bearings E1 X-life
FAG E1 spherical roller bearings are used in all kinds of applications where heavy loads have
to be accommodated or where shaft deflections or misalignments of bearing seats must be
compensated for. They operate reliably in the harshest environmental conditions, for
example in gearboxes, paper machines, construction machinery and vibrating machinery.
FAG Cylindrical Roller Bearings X-life
With improved surface quality, the load ratings of X-life cylindrical roller bearings have been
increased even further in engineering applications. The dynamic load rating is 18 % higher
than in the older style used cylindrical roller bearings. The basic rating life has increased by
up to 70 %.
Strategic Roadmap 2016
Launched
Represents a shared vision of
Schaeffler Asia Pacific region.
Regional goals and strategic
direction to realise a strong
competitive position for Schaeffler
in this region articulated.
In 2012, FAG was presented with
an award for Excellence in Design
and Development by Maruti Suzuki
India
-
37
Edelweiss Securities Limited
FAG Bearings
Valuation
FAG, the second largest bearing player in India, is structurally well positioned with strong
demand drivers for auto and industrial bearings. Strong gross block addition (doubling over
CY10-15E), demand uptick and localisation of industrial traded sales will be catalysts to the
company posting 31% and 32% earnings in CY14E and CY15E, respectively, post -24%
inCY13. A diversified portfolio, leadership in the differentiated cylindrical and spherical
bearings, a formidable service network and strong parentage equip it with significant
competitive advantage. We believe localisation of industrial sales will lead to narrowing of
the discount to the market leader, SKF, rendering improved visibility to gross margin
expansion.
Given the weak macro environment, we believe FAG maintaining its cash flow is
commendable and this could improve in the near future despite the huge capex. We expect
free cash flow over the next two years to be INR4.4bn (versus INR3.4bn in past six years).
As a result, we expect the companys net cash to stand augmented by 1.7x to
INR339/share in CY15E (22% of current market cap). Further, the companys EBITDA margin
is likely to expand led by new value-added products, gross margin expansion and operating
leverage. The company has a strong earnings growth trajectory, debt-free balance sheet and
robust cash flows with healthy average RoE and core RoCE of ~22% and 44%, respectively.
At current market price, FAG is trading at P/E of 16.3x CY14 and 12.3x CY15 earnings
estimates. It is trading slightly above mid-end of its historic valuation; on a relative basis,
SKF is trading at 12x CY15E below mid band of its valuation. FAG is expected to deliver net
profit CAGR of 31% over CY13-15E. We believe the stock is a re-rating candidate given its
consistent track record, direct beneficiary of localisation of industrial sales, strong returns
profile and earnings growth trajectory. Hence, we initiate coverage on the stock with BUY
recommendation and target price of INR2,022 based on 16x CY15E EPS, at higher band of its
valuation.
Table 5: Peer comparison
Source: Bloomberg, Edelweiss research
Note: *NRB and Global players estimates are as per bloomberg
Companies Currency Mcap
(INR bn) CY13/FY14E CY14/FY15E CY15/FY16E CY13/FY14E CY14/FY15E CY15/FY16E CY13/FY14E CY14/FY15E CY15/FY16E
Domestic Players
SKF INR 33.5 (7.8) 22.7 29.9 19.1 15.6 12.0 14.3 15.7 17.9
FAG INR 25.9 (23.5) 30.6 31.9 21.3 16.3 12.3 12.8 13.8 14.9
NRB* INR 4.8 (17.9) 37.5 20.0 9.0 6.5 5.5 21.9 17.9 22.0
Global Players*
Timken USD 361 (33.7) 19.4 22.0 19.3 16.2 13.3 14.1 21.4 27.7
SKF AB SEK 689 (24.4) 47.8 17.8 20.6 13.9 11.8 4.4 24.8 25.9
NSK JPY 37829 112.4 35.5 12.8 18.2 13.4 11.9 10.9 12.1 11.9
ROE (%)P/E (x)Core EPS Growth (%)
Stock to trade at a premium to its
historic valuation at 16x CY15E
with strong capacity uptick in
manufacturing sales, earnings
CAGR of 31%, direct beneficiary
of rising localisation; strong focus
area of the parent
-
Miscellaneous
38
Edelweiss Securities Limited
Chart 6: One year forward P/E
Source: Bloomberg, Edelweiss research
0
500
1,000
1,500
2,000
2,500
Ap
r-0
4
Se
p-0
4
Ma
r-0
5
Se
p-0
5
Ma
r-0
6
Se
p-0
6
Ma
r-0
7
Se
p-0
7
Ma
r-0
8
Se
p-0
8
Ma
r-0
9
Se
p-0
9
Ma
r-1
0
Au
g-1
0
Fe
b-1
1
Au
g-1
1
Fe
b-1
2
Au
g-1
2
Fe
b-1
3
Au
g-1
3
Fe
b-1
4
(IN
R )
7x
9x
15x
13x
11x
-
39
Edelweiss Securities Limited
FAG Bearings
Key Risks
Delay in recovery in key segments
Slowdown in four-wheeler sales momentum can impact our sales growth projections since
four wheelers and commercial vehicles together contribute ~75% to FAGs auto OEM
revenues.
Forex fluctuation
FAG buys traded goods from group company (Schaeffler Tech AG, Germany). As a result, INR
depreciation against EUR may negatively impact margin on these EUR-denominated
imports. Imports constitute 33% of net sales. This also includes currency headwinds on
~34% of raw material costs (~11% of net sales) which are imported. Netting exports, which
are 14% of sales, the companys overall net imports constitute 19% of net sales. However,
the impact of forex fluctuation is limited as FAG follows a policy of hedging exposure over 4
quarters.
Royalty rate increase
Currently, royalty, trademark and service fees as a percentage of overall sales stand at 2%.
Any increase in the same could pose a risk.
Delay in ramping up Savli facility
Any execution delay in ramping up the Savli plant could impact growth as well as our
earnings estimates.
Japanese competition
International players like NSK, Nachi and Koyo are setting up base in India. This will heighten
competition in the auto bearings industry over the long term.
-
Miscellaneous
40
Edelweiss Securities Limited
Company Description
Fig. 1: Evolution of FAG Bearings India
Source: Company
About FAG Bearings India
FAG is part of the Schaeffler Group of Germany, a leading global supplier in bearings with
revenues of EUR11bn (as of CY12). FAG, Germany, holds 51% stake in the company. In India,
FAG is the second largest player with market share of ~17% and ~45% in overall bearings
industry and roller bearings segment, respectively. The companys business spans across
rolling bearings and services systems. Within bearings, the company caters to automobile
OEM bearings, automobile aftermarket bearings, industrial OEM bearings, industrial after
market bearings and exports. Strong technological prowess and rich product portfolio
enable the company to partner with OEMs right from the product development stage. It has
a technology licence agreement with parent and pays royalty and technical fees of ~2% of
revenues.
While the company manufactures automotive bearings and part of industrial bearings
(~35%), balance 65% of industrial bearings are imported. As a result traded (industrial)
goods constitute 32% of overall revenue, which are majorly imported from overseas
Schaeffler Group companies. The company also exports 14% of its sales to the Schaeffler
Group.
FAG has plants at Vadodara with capacity of 51 mn, production of 78mn units and operating
at 154% utilization as on CY11. In terms of reach, the company has a pan-India presence
with ~200 distributors. The Savli plant, which was set up in CY12, increased companys ball
bearings capacity by 36mn units to 86.9 mn.
In India, FAGs exposure to the auto segment is 35%. 14% of sales are catered to by exports.
Within the auto segment, the company has high exposure to PV and CV segments (catering
to ~44% and ~30% of auto OEM bearings revenues respectively). Within automotive
revenue, ~66% is catered to OEMs and ~34% comes from replacement. Balance 51% of
overall revenues comes from industrial sales. Within industrial, ~65% is catered to OEMs
and 35% comes from replacement.
FAGs joint venture company, FAG Roller Bearings, manufactures taper roller bearings at its
Chakan unit near Pune.
2012
Savli plant commiss-
ioned atVadodara
which caters to ball
bearings and large
size industrial bearings
1964
Production
commenced at
Vadodara Plant
1975
Expansion:
Railway bearing
plant was
commissioned
1992
Brand name
changed from
NORMA to FAG
1999
Commissioned
India's first Wheel
Bearing Plant at
Vadodara Limited from
Norma HoffmanPlant
2003
Validation Centre
set up
at Vadodara
2010
Commenced
advanced X-life
bearing
production at
Vadodara
1962
Precision
Bearings India
Limited was
incorporated
1969
FAG Germany
acquired shares
from Norma
Hoffman
1986
Name of the
Company changed to
FAG Bearings India
LimitedNorma
HoffmanPlant
1997
Commissioned
export oriented
unit for cylindrical
roller bearings
2001
FAG
became a
part of Schaeffler
Group
2007
Introduced
E1 Spherical
Roller Bearings
2011
Commissioned
3rd Generation
Wheel Bearing
Plant at
Vadodara
FAG is No.2 player in Indian
bearings market with ~17%
market share
-
41
Edelweiss Securities Limited
FAG Bearings
The company has identified India as one of its major growth markets. FAG, a listed entity in
India, currently has two production sites and one R&D center employing over 1,580. The
companys plants are situated at Maneja (Baroda) and Savli (Baroda). Parent also has
unlisted companies INA India (majorly catering to needle roller bearings) and Luk India
(~22% market share in clutches). These companies posted sales of INR5bn and INR2.7bn,
respectively, in Dec 2012 and Dec 2010 respectively. INAs plant is located at Talegaon
(Pune) and Luks plant is located at Hosur (Tamil Nadu).
Chart 7: Business mix as on CY12
Source: Company, Edelweiss research
Chart 6: Segment wise applications
Source: Company, Edelweiss research
Auto OEMs -
4W,CV
17%
Auto OEMs -
2W
6%
Auto
aftermarket
12%
Industrial
OEMs
33%
Industrial
aftermarket
18%
Exports
14%
Segment Product
Automotive Ball bearings
Tapered roller bearings
Barrel roller bearings
Automotive Aftermarket Deep grove ball bearings
Seals
Industrial Spherical and cylindrical roller bearings
Angular contact ball bearings
Axial Spherical roller bearings
Self aligning bearing
Industrial aftermarket Replacement part with service solutions
Manufactured
67%
Traded
32%
Others
1%
-
Miscellaneous
42
Edelweiss Securities Limited
Chart 8: Sales break up trend
Source: Company, Edelweiss research