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CRISIL IER Independent Equity Research

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NRB Bearings Ltd

Detailed Report

Explanation of CRISIL Fundamental and Valuation (CFV) matrix

The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process – Analysis

of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental grade is assigned on a

five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The valuation grade is assigned on a five-

point scale from grade 5 (indicating strong upside from the current market price (CMP)) to grade 1 (strong downside from the CMP).

CRISIL

Fundamental Grade Assessment

CRISIL

Valuation Grade Assessment

5/5 Excellent fundamentals 5/5 Strong upside (>25% from CMP)

4/5 Superior fundamentals 4/5 Upside (10-25% from CMP)

3/5 Good fundamentals 3/5 Align (+-10% from CMP)

2/5 Moderate fundamentals 2/5 Downside (negative 10-25% from CMP)

1/5 Poor fundamentals 1/5 Strong downside (<-25% from CMP)

Research Analysts

Bhaskar Bukrediwala

[email protected]

Ankit Kedia

[email protected]

Client servicing desk

+91 22 3342 3561

[email protected]

mailto:[email protected]


NRB Bearings Ltd

Fundamental Grade: 4/5 (Superior fundamentals) Valuation Grade: 5/5 (CMP has strong upside)

Industry: Auto Components Fair Value: ₹143 CMP: ₹107

December 30, 2016

For detailed initiating coverage report please visit: www.crisil.com

CRISIL Independent Equity Research reports are also available on Bloomberg (CRI <go>) and Thomson Reuters.

After a revival in growth in H1FY17, NRB Bearings Ltd (NRB) is poised to grow at a healthy

12.5% CAGR over the next two years, aided by strong growth in domestic automobile sales

and the company’s foray into new export markets. Auto production growth, which fell in FY16

(2% vs 8% in FY15), has picked up in H1FY17, and is expected to further accelerate due to a

revival in consumption-related spending, despite the adverse short-term impact of

demonetisation. Being an established player, NRB is well-placed to tap into this growth

potential. Within exports, fall in euro and delay in orders from clients in Europe resulted in a

11% fall in export revenues. With the company’s focus on diversifying into fast-growing

geographies and expanding its client base, we expect export growth to revive. We maintain

our fundamental grade of 4/5.

Robust domestic automobile growth to drive NRB’s OEM segment

Automobile production posted robust growth of 11.8% y-o-y in H1FY17 to 14 mn units. While

demonetization is likely to impact rural demand in the short run, normal monsoon and

sufficient reservoir levels across the country, are likely to aid growth over the next two-three

quarters. This is likely to translate into healthy demand for two-wheelers (which account for

48% of domestic OEM sales), tractors and light-commercial vehicles. With presence across

major automobile segments, and a diversified client base, NRB is expected to be a key

beneficiary. We expect its domestic OEM-led revenue to grow at a 13% CAGR over FY16-

FY19E.

Geographical diversification to aid export growth over FY16-FY19E

With the export revenue impacted by a weak euro, the company is looking to expand its

geographical presence, by focusing on fast-growing markets in South America, and to lower

its dependence on Europe. We believe these initiatives, coupled with a pick-up in orders from

the existing clients after the Volkswagen scandal, would help it register healthy growth in

exports. We forecast its export revenue to grow at a 10% CAGR over FY16-18E. However,

political uncertainty over Brexit and a slowdown in the key Eurozone economies remain

monitorables.

EBITDA margin to expand to 17.7% by FY18

A steep 200 bps rise in employee cost as a percentage of sales, coupled with partly idle

capacity due to a delayed offtake by a few export clients, led to a 210 bps contraction in

EBITDA margin in FY16. Going forward, the expected pick up in domestic and export

volumes is expected to result in margin expansion owing to operating leverage. We forecast

the EBITDA margin to expand 90 bps to 17.7% by FY18.

Valuations: We raise our fair value estimate to ₹143

We lower our FY17 and FY18 projections to factor in the near term impact of demonetisation.

However, we also lower our cost of equity assumption by 100 bps factoring in the fall in

interest rates and rolled forwarded valuation by one year to FY18. Consequently, we raise our

DCF-based fair value to ₹143. At the current market price of ₹107, the valuation grade is 5/5.

KEY FORECAST

(₹ mn) FY15 FY16 FY17E FY18E FY19E

Operating income 6,685 6,726 7,348 8,205 9,296

EBITDA 1,261 1,133 1,256 1,452 1,695

Adj net income 527 440 541 665 807

Adj EPS (₹) 5.4 4.5 5.6 6.9 8.3

EPS growth (%) 58.6 (16.5) 23.0 22.8 21.5

Dividend yield (%) 1.4 1.4 1.9 2.1 2.6

RoCE (%) 16.9 13.8 15.2 17.2 19.7

RoE (%) 22.0 16.3 18.0 19.6 21.0

P/E (x) 19.7 23.6 19.2 15.6 12.9

P/BV (x) 4.0 3.7 3.3 2.9 2.5

EV/EBITDA (x) 10.6 11.7 10.2 8.9 7.6

NM: Not meaningful; CMP: Current market price

Source: Company, CRISIL Research estimates

CFV MATRIX

KEY STOCK STATISTICS

NIFTY/SENSEX 8186/26626

NSE/BSE ticker NRBBEARING

Face value (₹ per share) 2

Shares outstanding (mn) 96.9

Market cap (₹ mn)/(US$ mn) 10,380/153

Enterprise value (₹ mn)/(US$ mn) 13,174/194

52-week range (₹)/(H/L) 148/100

Beta 1.0

Free float (%) 45.1%

Avg daily volumes (30-days) 11,156

Avg daily value (30-days) (₹ mn) 1.2

SHAREHOLDING PATTERN

PERFORMANCE VIS-À-VIS MARKET

Returns

1-m 3-m 6-m 12-m

NRB -4% -15% -8% -22%

NIFTY 500 -1% -6% 0% 4%

1 2 3 4 5

1

2

3

4

5

Valuation Grade

Fu

nd

am

en

tal G

rad

e

Poor

Fundamentals

Excellent

Fundamentals

Str

on

g

Do

wn

sid

e

Str

on

g

Up

sid

e

55.3% 55.1% 55.0% 54.9%

44.7% 44.9% 45.0% 45.1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Dec-15 Mar-16 Jun-16 Sep-16

Promoter Public

http://www.crisil.com/

2

Table 1: NRB Bearings Ltd - Business environment

Domestic (OEM) Exports Aftermarket

(replacement)

Revenue contribution –

FY16 ~66% ~21% ~13%

Revenue contribution -

FY19E ~69% ~20% ~11%

Sales CAGR (FY13-16) ~6% ~4% ~2%

Sales CAGR (FY16-19E) ~13% ~10% ~6%

Key products/ service

offering

● Big-end bearings

● Bush bearings

● Crank pins

● Cylindrical bearings

● Specialised ball bearings

● Steering column bearings

● Tapered roller bearings

● Rocker-arm bearings

● Needle and cylindrical bearings

● Planetary shafts

● Polyamide cages

● Rings and sleeves

● Specialised ball and tapered

roller bearings

● Ball bearings

● Big-end bearings

● Bush bearings

● Hub pins

Key customers

● Ashok Leyland Ltd

● Bajaj Auto Ltd

● Hero MotoCorp Ltd

● Honda Motorcycle & Scooters

India Ltd

● Mahindra and Mahindra Ltd

● Tata Motors Ltd

● Maruti-Suzuki

● Daimler Trucks

● Getrag Transmissions

Corporation (world’s largest

supplier of transmission systems

to passenger/commercial

vehicles)

● GKN Driveline (European

automotive and aerospace

player)

● Renault Volvo

● ZF Friedrichshafen AG

(Germany-based global leader

providing driveline technology to

auto OEMs)

● Sold through

dealers

Demand drivers

● Expected demand revival in

domestic auto sector

● Increased mining of existing

clients through product

development

● Client acquisition/entry into new

segments

● Increased mining of existing

customers through new product

development

● New client acquisitions

● Product launches

● Deeper

penetration and

wider range of

specialised

bearings

Key competitors ● Unlisted player in India - INA Bearings

● Listed players in India - SKF India, FAG Bearings and Timken India

Key risks

● Cyclicality in the automobile industry

● Foreign-currency risk

Source: Company, CRISIL Research

3

Fig 1: Revenue break-up, by market Fig 2: Revenue break-up, by product

Source: Company, CRISIL Research Source: Company, CRISIL Research

Domestic OEM, 66%

Domestic Aftermarket,

13%

Export, 21%2015-16

Needle roller bushes &

cages42%

Ball & roller bearings

38%

Automobile components

16%

Others4% 2015-16

4

Grading rationale

Robust growth in domestic automobile production, coupled

with an entry into new export markets, to drive growth

NRB is expected to be a key beneficiary of robust automobile growth, with 66% of its

revenue derived from the domestic OEM segment. After a lacklustre FY16, automobile

production posted a strong 11.8% y-o-y growth in H1FY17 to ~14 mn units, led by two-

wheelers (2W), passenger vehicles (cars and utility vehicles) and tractors. This trend is

likely to accelerate with the expected pick-up in consumption-related spending. With

presence across major automobile segments, and a diversified client base, NRB is well-

placed to tap into this growth potential.

Further, the company’s planned foray into fast-growing export markets and its focus on

diversifying the client base are expected to revive export growth over the next couple of

years. Based on these factors, we forecast revenue to grow at a 11.4% CAGR over FY16-

FY19E

Table 2: Outlook on key automobile segments

Segment Sales volume growth CAGR

Comments – Near-term growth prospects H1FY17 FY17E FY16-21E

Two-wheelers 18% 13-14% 6-8% Demonetisation to impact rural sales in H2FY17

Passenger

vehicles (PVs) 12% 9-11% 11-13% New launches to drive demand for PVs in H2FY17

Commercial

vehicles 6% 5-7% 9-11%

Slowing replacement demand to impact MHCV volume;

demonetisation to impact LCV and ICV demand during H2FY17

Tractors 20.3% 16-18% 9-11% Recovering reservoir levels and growth in Kharif sowing (up 6.5%)

to aid spending on tractors

E: Estimated

Source: CRISIL Research

Fall in exports and subdued domestic automobile production

impacted FY16 revenue

A steep fall of 11.4% y-o-y to ₹1,348 mn in exports, coupled with a slowdown across

automobile segments, led to a subdued FY16 for the company, with revenue flat at ₹6,726

mn. India’s automobile production grew at a tepid 2.3% in FY16, compared with 8% in

FY15. Consequently, NRB’s domestic OEM revenue growth slowed to 6.2%, compared

with 12.6% in 2014-15. This was also reflected in its peers’ revenues, with growth falling

below the FY15 levels.

5

Fig 3: Revenue growth flat (0.6%) in FY16 Fig 4: Fall in domestic auto production impacted revenue

*Peers include FAG Bearings India, Timken India and SKF India


Table 3: Past growth in key automobile segments

y-o-y growth in production FY14 FY15 FY16

Two wheelers 7.2% 9.5% 1.8%

Passenger vehicles -4.5% 4.5% 5.5%

Commercial vehicles -16.0% -0.5% 12.6%

Tractors 22.3% -13.4% -6.9%

Total 4.6% 7.9% 2.3%


Diversified client base helped in absorbing domestic slump to a

large extent; maintained market share among organized players

Despite tepid growth in automobile production (2.3%), the company was able to post

higher growth of 7.6%, due to a diversified client base across segments. This was mainly

because of higher-than-industry growth posted in the CV and tractor segments (despite a

10% y-o-y fall in tractor production), due to the company’s association with fast-growing

players in these segments. Consequently, the company retained its market share of 12%

in the domestic organised sector.

Domestic OEM segment to grow at a healthy 13% CAGR on

strong automobile demand

While demonetisation is likely to impact rural automobile demand in the short run, we

believe the impact is likely to moderate over the next two-three months. With the expected

pick-up in agricultural output amidst a normal monsoon and sufficient reservoir levels

across the country, revival in rural spending is on the anvil. This is likely to translate into

healthy demand for two-wheelers, tractors and, light and intermediate commercial vehicles.

Further, the implementation of the Seventh Pay Commission recommendations, coupled

with new model launches by auto majors, is expected to result in a healthy rise in PV sales

in the near term. With the presence across these fast-growing segments (2W – 48 % of

domestic sales, tractors – 11%, CVs - 26%, PVs - 15%), NRB is expected to post a 13%

CAGR in domestic OEM revenue over FY16-19E.

5,600 5,912

6,093

6,685

6,726

16.3

5.6

3.1

9.7

0.6

0

2

4

6

8

10

12

14

16

18

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

FY12 FY13 FY14 FY15 FY16

(%)(₹ mn)

Revenues % growth y-o-y

14.2

0.9

4.6 7.9

2.3

16.3

5.6

3.1

9.7

0.6

13.4

(3.2)

5.2

10.5

4.6

-5

0

5

10

15

20


(%)

Auto production NRB's revenue Peer revenue*

Maintained a 12% market share in

the domestic organised sector

Growth y-o-y

6

Fig 5: Domestic OEM revenues to grow 13% CAGR over FY16-19E


Order delays and lower euro exchange rate impacted exports;

expect foray into new markets to drive growth in FY16-19E

After a period of robust growth (~40% CAGR over FY11-15), NRB’s exports fell 11% in

FY16, because of a slowdown in orders and a fall in Euro-INR exchange rate. As direct

fallout of stagnant growth in developed economies and decelerating growth in key markets,

the company faced slowing orders from its major clients in the European region, including

Renault, Volvo, Daimler Trucks and Audi. Also, major global OEMs were circumspect

about onboarding new suppliers and were reviewing their current procurement policies in

the wake of emission-related violations by Volkswagen. Consequently, the company was

unable to onboard new customers during H2FY16. This also resulted in cost implications,

since a part of the production capacity remained idle, owing to commitments and delayed

offtake by clients. Further, a 6.7% fall in EUR-INR to 72.7 ₹/Euro in FY16, added to the

decline, as a major portion of its export revenue is from Europe.

Management indicated that it plans to expand the company’s geographical presence as

well client base to avoid dependence on Europe. It is looking to make further inroads in the

Americas, in countries which have a fast-growing auto-components industry. We believe,

these initiatives would help NRB diversify its export client base and markets. However, with

Europe currently contributing a major part of its exports, political uncertainty over Brexit

and a slowdown in the key Eurozone economies may impact growth and are thus key

monitorables. We forecast export revenue to grow at 10% CAGR over FY16-19E.

4,042

4,348 4,831 5,477 6,276

9.9%

7.6%

11.1%

13.4%

14.6%

0%

2%

4%

6%

8%

10%

12%

14%

16%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY15 FY16 FY17E FY18E FY19E

(%)(₹ mn)

Domestic OEM revenues y-o-y growth (RHS)

7

Fig 6: Euro-INR movement impacted FY16 exports Fig 7: Expect exports to pick up in FY17

Source: RBI, CRISIL Research Source: Company, CRISIL Research

Aftermarket segment growth remains tepid; New initiatives to

yield results only in the long run

NRB’s aftermarket growth has been steady albeit a tepid 3% CAGR over FY11-16. The

segment’s contribution to overall sales declined to 12-13% in FY16 from 18% in FY11. The

company largely caters to the price-sensitive two- and three-wheeler segments, where it

faces stiff competition from several organised players, such as SKF Bearings, FAG

Bearings, Timken India and INA Bearings, in addition to cheaper Chinese imports.

To improve its aftermarket sales, the company is planning to launch a new branding

campaign, with improved packaging and focus on tier-III and rural markets. It also plans to

foray into the tractor segment, which has a relatively shorter bearing-replacement cycle.

However, we expect these initiatives to help NRB gain ground in the long run, given the

high competitive intensity. We expect the company to make gradual inroads into the

segment over the next three years, with revenue growing at a 5.7% CAGR over FY16-19E.

Fig 8: Aftermarket revenue to grow at a 6% CAGR over FY16-19E


60

65

70

75

80

85

90

Ja

n-1

4

Mar-

14

Ma

y-1

4

Ju

l-14

Sep

-14

No

v-1

4

Ja

n-1

5

Mar-

15

Ma

y-1

5

Ju

l-15

Sep

-15

No

v-1

5

Ja

n-1

6

Mar-

16

(₹/Eur)

Eur-Inr exchange rate

1,548 1,378 1,488 1,637 1,834

14.0%

-11.0%

8.0%10.0%

12.0%

-15%

-10%

-5%

0%

5%

10%

15%

20%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000


(₹ mn)

Export revenues y-o-y growth (RHS)

835

847

881

925 999

6.3%

1.4%

4.0%

5.0%

8.0%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

750

800

850

900

950

1,000

1,050


(%)(₹ mn)

Aftermarket revenues y-o-y growth (RHS)

8

R&D focus helps maintain the competitive edge

The company’s focus on research and development (R&D) through investments in

technology has enabled it to onboard several large automobile manufacturers as clients. It

is a tier-1 supplier to domestic OEMs, such as Hero MotoCorp, Bajaj Auto, Eicher Motors,

Tata Motors, Maruti Suzuki and Ashok Leyland and tier-I/tier-II supplier to global majors,

such as Renault Volvo, ZF group, Daimler Trucks and the Getrag group. Because of to the

customised nature of its products, many clients engage the company right from the product

conceptualisation stage. This has helped the company developed sticky relationships with

clients. Further, the company’s strategic focus on the needle-roller bearing has helped it

maintain leadership in the segment (~70% market share). NRB spent ₹81 mn on R&D

during FY16.

New product forays yet to bear fruit

The company is planning to directly cater to defense and railway-related projects. It has

earlier won an order from Defense Research and Development Organisation (DRDO) and

developed a working relationship with the Indian Railways as a tier-II supplier. However,

these initiatives have not yet resulted in significant orders for the company.

Operating margin expected to rise to 18.2% by FY19E

A sharp rise in employee cost – up 200 bps to 18.8% as a percentage of sales – because

of higher provisioning for gratuity and bonus, coupled with partly idle capacity due to

delayed offtake by a few export clients, led to a 210 bps contraction in EBITDA margin to

16.8% in FY16. The expected pick-up in domestic and export volumes is expected to result

in margin expansion due to operating leverage. We forecast EBITDA margin to expand

140 bps to 18.2% by FY19E.

Fig 9: Movement in EBITDA margin and revenue growth Fig 10: EBITDA margin expected to expand 140 bps


18.8

14.3

10.3

(0.9)

2.1

(4.6)

(4.6)

10.4 9.2

6.9

26.5

18.6 18.3

13.8 14.5

18.3

12.8

17.9 16.8

15.8

10

12

14

16

18

20

22

24

26

28

-10

-5

0

5

10

15

20

Q1F

Y15

Q2

FY

15

Q3

FY

15

Q4

FY

15

Q1

FY

16

Q2

FY

16

Q3

FY

16

Q4

FY

16

Q1F

Y17

Q2

FY

17

(%)(%)

Revenue growth y-o-y EBITDA margin (RHS)

1,261 1,133 1,256 1,452 1,695

18.9%

16.8%17.1%

17.7%

18.2%

15.5%

16.0%

16.5%

17.0%

17.5%

18.0%

18.5%

19.0%

19.5%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800


(₹ mn)

EBITDA EBITDA margin (RHS)

Maintained focus on R&D


50 59 70 72 81

0.9%

1.0%

1.2%1.1%

1.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

0

10

20

30

40

50

60

70

80

90


(₹ mn)

R&D expense (P&L) As a % sales

9

Better operating margin versus peers, but longer working

capital cycle leads to moderate ROCE

NRB’s operating margin (18.4% - average of last five years) is higher than its peers, due to

its better product mix, comprising higher-margin customised products (45% of sales are

from needle-roller bearings), and integrated manufacturing, compared with off-the-shelf

products and trading operations of its peers. However, its products are manufactured in

lower volume due to their specialised nature, with a requirement to maintain a minimum

amount of inventory across its range of stock keep units (SKUs). With a large product

range of more than 500 type of bearings, (SKF in comparison has ~150), this leads to

higher inventory days compared to peers. Consequently, the company has a longer

working capital cycle resulting in moderate ROCE compared with peers. However, due to a

more efficient capital mix, the company generates higher ROE.

Fig 11: EBITDA margin higher than peers, however… Fig 12: …stretched working capital cycle due to high

inventory…

Note: SKF, Timken and FAG Bearings India have trading sales, Margin calculated by taking average previous five reporting periods

Note: Average working capital days of previous five reporting periods


Fig 13: …leads to moderate ROCE Fig 14: ROE is higher due to an efficient capital mix

Note: Average RoCE of previous five reporting periods


Note: Average RoE of previous five reporting periods


17.2%

12.3%

12.8%

18.4%

0% 5% 10% 15% 20%

FAG Bearings

SKF India

Timken India

NRB Bearings

FAG Bearings SKF India Timken India NRB Bearings

74

66

92

136

0 20 40 60 80 100 120 140 160

FAG Bearings

SKF India

Timken India

NRB Bearings


24.4%

21.5%

23.8%

16.4%

0% 5% 10% 15% 20% 25% 30%

FAG Bearings

SKF India

Timken India

NRB Bearings


19.2%

17.5%

17.9%

19.5%

16.5% 17.0% 17.5% 18.0% 18.5% 19.0% 19.5% 20.0%

FAG Bearings

SKF India

Timken India

NRB Bearings


10

Key risks

Dependence on domestic OEMs; cyclicality of the industry

NRB derives 66% of revenue from the domestic auto industry, which is cyclical. However,

its presence across various sub-sectors (such as two-wheelers, three-wheelers, four

wheelers and commercial vehicles) mitigates this risk. Though we expect growth in the

auto industry to pick up in H2FY17, a delay could have a negative impact.

Foreign-currency volatility

The company is exposed to foreign-currency volatility through debt and exports (21% of

revenue). Although exports provide a natural hedge to its foreign-currency borrowings, the

risk associated with volatile currency movements persists.

Volatility in raw material prices

Passing on higher raw material costs - an industry-wide phenomenon - to customers is a

challenge. For instance, the company’s inability to pass on the sharp increase in raw

material cost (steel and oil) entirely to its customers led to low profitability in FY09.

11

Financial outlook

Revenue to record a 11% CAGR to ₹9.3 bn during FY16-19E

We estimate revenue to grow at 11.4% CAGR over FY16-19E. Driven by higher demand in

the key automobile segments (such as two-wheelers, tractors and CVs) over the period,

domestic OEM revenue is expected to grow at a 13% CAGR. Exports are expected to

grow at a healthy two-year CAGR of 10%, aided by client addition across geographies.

Fig 15: Revenue to grow at a three-year CAGR of 11% Fig 16: Revenue mix


EBITDA margin to expand to 18.2% by FY19E

We expect the operating margin to expand 140 bps to 18.2% over the next three years due

to operating leverage benefits stemming from higher volume.

Fig 17: EBITDA margin expansion on the cards


6,685 6,726

7,348

8,205 9,296

9.7

0.6

9.3

11.7

13.3

0

2

4

6

8

10

12

14

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000


(%)(₹ mn)

Revenues % Growth y-o-y (RHS)

63% 67% 67% 68% 69%

13%13% 12% 12% 11%

24% 21% 21% 20% 20%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Domestic After market Exports

1,261 1,133 1,256 1,452 1,695

18.9%

16.8%17.1%

17.7%

18.2%

15.5%

16.0%

16.5%

17.0%

17.5%

18.0%

18.5%

19.0%

19.5%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800


(₹ mn)

EBITDA EBITDA margin (RHS)

Revenue: To grow at 11% CAGR

during FY16-19E

12

PAT to record a CAGR of 22% over FY16-19E

We estimate profit after tax (PAT) to grow at a 22.4% CAGR over FY16-19E to ₹807 mn.

As a result, ROE and ROCE are expected to improve to 21.0% and 19.7% by FY19E from

16.2% and 13.8% in FY16, respectively.

Fig 18: PAT margin to rise over FY16-19E Fig 19: Return ratios to improve


527 440 541 665 807

7.9

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13

Q2FY17 Results Summary

NRB’s Q2FY17 revenue grew 6.9% y-o-y (lower than our expectations) to ₹1,797 mn.

EBITDA margin contracted by 256 bps y-o-y to 15.8%, owing to higher other expenses as

a percentage of sales (up 338 bps y-o-y). Owing to lower EBITDA, adjusted PAT declined

8.1% y-o-y to ₹164 mn.

Margin declined on account of forex related loss

EBITDA margin contracted by 256 bps y-o-y owing to steep rise in other expenses (up

31% y-o-y). This was mainly because of forex related loss of ₹11mn during Q2FY17,

compared to a forex gain of ₹33 mn in Q2FY16. Higher depreciation and interest expense

(up 15.2% and 11% y-o-y), were offset by higher other income (up 123.6% y-o-y).

Resultantly, adjusted PAT fell 8.1% y-o-y to ₹164 mn, in line with fall in EBITDA.

Q2FY17 Results (Standalone)

(₹ mn) Q2FY17 Q1FY17 Q2FY16 q-o-q (%) y-o-y (%) H1FY17 H1FY16 y-o-y (%)

Net sales 1,797 1,746 1,681 2.9 6.9 3,543 3,281 8.0

Raw Material Cost 905 880 843 2.8 7.4 1,785 1,656 7.8

Raw Material as % of sales 50.4% 50.4% 50.1% -3 bps 22 bps 50.4% 50.5% -12 bps

Other expenses 335 284 257 18.1 30.5 619 544 13.9

Employees Cost 273 289 273 (5.5) 0.1 562 540 4.1

EBITDA 283 293 308 (3.4) (8.0) 577 540 6.8

EBITDA margin 15.8% 16.8% 18.3% -103 bps -256 bps 16.3% 16.5% -18 bps

Depreciation 73 74 64 (1.3) 15.2 148 124 19.0

EBIT 210 219 245 (4.1) (14.1) 429 416 3.1

Interest and finance charges 37 32 34 16.1 11.0 70 67 3.9

Operating PBT 173 187 211 (7.6) (18.1) 359 349 3.0

Other Income 58 14 26 327.4 123.6 71 37 91.9

Extraordinary Income/(expense) - - (21) NM NM - (21) NM

PBT 230 200 215 15.0 6.9 431 365 18.0

Tax 67 59 59 12.5 13.8 126 103 22.7

PAT 164 141 157 16.0 4.3 305 262 16.2

Adj PAT 164 141 178 16.0 (8.1) 305 283 7.5

Adj PAT margin 9.1% 8.1% 10.6% 103 bps -148 bps 8.6% 8.6% -4 bps

No of equity shares (mn) 96.9 96.9 96.9 - - 96.9 96.9 -

Adj EPS (₹) 1.7 1.5 1.8 16.0 (8.1) 3.1 2.9 7.5


14

Management Overview

CRISIL's fundamental grading methodology includes a broad assessment of management

quality, apart from other key factors, such as industry and business prospects, and

financial performance. The board is broad-based; its members have multi-disciplinary

experience, which aids decision-making.

Experienced management

Trilochan Singh Sahney, Executive Chairman, is the founder-promoter of NRB. He has

handed over the operational management to his daughter Harshbeena Zaveri, currently

Managing Director and President. She has almost 26 years of experience in the bearings

industry and spearheaded the company’s foray into design engineering. Under her

leadership, the company set up an R&D centre and increased export sales by tapping

leading global automobile OEMs.

Strong focus on in-house R&D

NRB set up an in-house R&D centre in 2000. This has enabled the company position itself

as a supplier of high-end/critical applications to domestic and global OEMs, offering a wide

product range. Being a preferred supplier also means that NRB is the first port of call, as

global OEMs expand their footprint in India. The company also has a material sciences

R&D centre in Waluj.

Strong second line of management

The company has inducted various professionals at senior and middle-management levels,

who have significant experience in the bearings industry.

● Tanushree Bagrodia, CFO, is an INSEAD MBA graduate with a substantial

experience in investment banking.

● Sanjeev Parida, Senior Vice President, heads the human resources,

business systems and process functions. He more than 20 years of

experience and has previously worked at Tech Machindra,

● Mr Hemant Jog, Vice President, Manufacturing. He holds a Bachelor’s

degree in Mechanical Engineering and a Post Graduate Diploma in

Materials Management. He has 28 years of experience in the bearings

industry.

● Mr Gagan Mathur, Vice President, Sales and Marketing, has more than 15

years of experience in the engineering and components industry.

15

Corporate Governance

CRISIL’s fundamental grading methodology includes a broad assessment of corporate

governance and management quality, apart from other key factors such as industry and

business prospects, and financial performance. In this context, CRISIL Research analyses

the shareholding structure, board composition, typical board processes, disclosure

standards and related-party transactions. Any qualifications by regulators or auditors also

serve as useful inputs, while assessing a company’s corporate governance.

NRB’s corporate governance is good. It is supported by a strong board and efficient

practices. It adheres to all regulatory requirements.

Board composition complies with the listing norms

The board comprises eight members, of whom one is an executive chairman and four are

independent directors, thereby meeting the requirements under Clause 49 of the SEBI’s

listing guidelines. The independent directors are highly qualified, have strong industry

experience.

Board processes

Necessary committees – such as audit, stakeholders’ relationships and nominations, and

remuneration - are in place, headed by independent directors. These committees have a

wider scope and, hence, the decision-making process is collaborative and appropriate.

Quality of earnings and disclosure standards

Quality of earnings is good as reflected in the following:

− Accounting policies are appropriate and conservative.

− The company has been generating operating cash flow over the past few years,

in line with revenue growth.

− High debtor and inventory days, due to the high inventory required by the

customised nature of its business.

The company has maintained a healthy dividend payout ratio of 33% on an average

over the past five years. Compared with PAT growth, the dividend payout is

appropriate and, hence, benefits the minority shareholders.

Based on public information, including annual reports and website uploads, the

disclosure standards are satisfactory. Although the company does not hold an investor

conference call (after the quarterly results), it shares information regularly.

16

Valuation Grade: 5/5

We lower our FY17 and FY18 projections to factor in the near term impact of

demonetisation on auto demand. However, we also lower our cost of equity assumption by

100 bps factoring in the fall in interest rates and rolled forwarded valuation by one year to

FY18. Consequently, we raise our DCF-based fair value to ₹143. The fair value implies

15.6x FY18E and 12.9x FY19E EPS. At the current market price of ₹107, the valuation

grade is 5/5.

Key DCF assumptions

Discounted value of the firm’s estimated free cash flows from FY17 to FY27.

Cost of equity of 14.6%.

Terminal growth rate of 3% beyond the explicit forecast period until FY27.

WACC computation

FY18-27 Terminal value

Cost of equity 14.6% 14.6%

Cost of debt (post tax) 4.2% 4.2%

WACC 9.0% 9.0%

Terminal growth rate 3%

One-year forward P/B band One-year forward EV/EBITDA band

Source: NSE, CRISIL Research Source: NSE, CRISIL Research

0

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(₹)

NRB 6x 12x

18x 24x 30x

0

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(₹ mn)

EV 4x 8x 12x 16x

Fair value rose to ₹143

17

P/E – premium / discount to CNX 500 P/E movement


Peer valuation comparison – consensus estimates

Company Currency M.Cap P/E P/B EV/EBITDA ROE (%)

FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E

NRB Bearings Ltd* ₹ bn 10 23.6 19.2 15.6 3.7 3.3 2.9 11.7 10.2 8.9 16.3 18.0 19.6

Bearings Manufacturers

Domestic

Fag Bearings India# ₹ bn 70 35.6 34.1 29.0 5.5 4.9 4.3 21.3 20.7 17.7 16.5 15.7 15.7

SKF India# ₹ bn 76 36.7 29.9 25.2 4.7 4.4 3.9 25.6 20.4 17.4 13.6 15.3 16.3

Timken India ₹ bn 38 41.0 33.5 27.6 7.2 6.2 5.3 22.8 19.4 16.0 19.1 19.5 20.3

Average

37.8 32.5 27.3 5.8 5.1 4.5 23.2 20.2 17.0 16.4 16.9 17.4

Median

36.7 33.5 27.6 5.5 4.9 4.3 22.8 20.4 17.4 16.5 15.7 16.3

Global

Timken# US$ bn 2 -38.0 16.6 15.9 1.9 - - 147.8 8.0 7.9 -4.9 11.7 -

SKF# US$ bn 66 17.0 14.8 13.0 2.7 2.6 2.4 7.5 8.1 7.7 16.2 17.0 18.4

* CRISIL Research estimates, # companies with year ending Dec - FY15 actual, FY16 and FY17 are estimates

Source: Industry, CRISIL Research; * CRISIL Research estimates

-80%

-60%

-40%

-20%

0%

20%

40%

60%

Ju

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No

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9

Apr-

10

Sep

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Ju

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c-1

1

May-1

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Mar-

13

Aug

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Premium/Discount to CNX 500

Median premium/discount to CNX 500

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35

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(Times)

1yr Fwd PE (x) Median PE

+1 std dev

-1 std dev

18

Auto Component sector valuation comparison – consensus estimates

Company Currency M.Cap P/E P/B EV/EBITDA ROE

FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E

Auto Component Manufacturers

Domestic

Motherson Sumi

Systems ₹ bn 424 31.3 24.7 19.0 9.4 7.2 5.6 12.5 11.0 8.9 33.7 32.3 33.2

Setco Automotive ₹ bn 6 4.6 14.4 13.0 0.5 2.2 1.9 12.3 9.4 8.5 11.1 15.7 15.9

Sundram Fasteners ₹ bn 38 31.7 24.6 20.5 6.6 5.3 4.3 18.9 15.2 13.2 22.5 22.3 22.9

Munjal Showa ₹ bn 8 14.3 12.0 10.4 1.9 1.7 1.5 6.4 5.8 5.1 14.2 15.2 15.5

Average

20.5 18.9 15.7 4.6 4.1 3.3 12.5 10.3 8.9 20.4 21.4 21.9

Median

14.3 10.2 6.2 1.9 1.6 1.1 9.4 7.7 5.9 18.6 18.9 20.2

Global

Delphi Automotive

PLC# US$ bn 22 13.0 11.0 10.1 8.2 6.0 4.5 9.7 7.7 7.2 60.9 61.0 49.5

Denso Corp JPY bn 5,315 14.4 16.1 14.2 1.1 1.1 1.0 5.6 5.8 5.4 7.6 6.9 7.6

Valeo SA# EUR bn 9 16.0 13.4 11.6 3.4 3.0 2.5 7.4 6.1 5.4 23.5 23.0 22.6

Average

14.5 13.5 12.0 4.2 3.4 2.7 7.6 6.5 6.0 30.7 30.3 26.6

Median

13.7 12.1 10.6 2.7 2.3 2.0 6.0 5.9 5.4 21.3 20.8 19.8

# Companies with year ending Dec - FY15 actual, FY16 and FY17 are estimates

Source: Industry, CRISIL Research

19

CRISIL IER reports released on NRB Bearings Ltd

Date Nature of report

Fundamental

grade Fair value

Valuation

grade

CMP

(on the date of report)

02-Jan-2014 Detailed report 4/5 ₹46 5/5 ₹36

07-Feb-2014 Q3FY14 result update 4/5 ₹46 4/5 ₹38

02-Jun-2014 Q4FY14 result update 4/5 ₹65 2/5 ₹85

01-Sep-2014 Q1FY15 result update 4/5 ₹104 3/5 ₹110

26-Dec-2014 Q2FY15 result update 4/5 ₹127 3/5 ₹123

30-Dec-2015 Detailed report 4/5 ₹127 3/5 ₹138

07-Apr-2016 Q3FY16 result update 4/5 ₹135 3/5 ₹130

28-Jun-2016 Q4FY16 result update 4/5 ₹135 4/5 ₹114

21-Sep-2016 Q1FY17 result update 4/5 ₹135 3/5 ₹131

30-Dec-2016 Detailed report 4/5 ₹143 5/5 ₹107

Share price movement Fair value movement since initiation


0

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NRB Bearings Nifty 500

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('000)(₹)

Total Traded Quantity (RHS) CRISIL Fair Value

NRB Bearings

20

Company Overview

NRB was incorporated in 1965 as Needle Roller Bearing Company Ltd. It was set up as a

joint venture (30% stake) with French needle bearings manufacturer, Nadella SA (later

acquired by Timken France), which provided technological support. In 2005, NRB

promoters bought Timken’s stake.

The company has eight manufacturing plants in Waluj, Jalna, Chikalthana (Aurangabad)

and Thane (Maharashtra), Pantnagar (Uttarakhand), Hyderabad (Andhra Pradesh), Ranchi

(Jharkhand) and Rayong (Thailand). Waluj and Jalna plants constitute more than 80% of

the company’s bearings production.

NRB has three subsidiaries: SNL Bearings Ltd (73.7% stake), and wholly owned

subsidiaries, NRB Bearings (Thailand) Ltd and NRB Bearings Europe GmbH. In October

2012, NRB demerged its industrial bearings division into a wholly owned subsidiary, NRB

Industrial Bearings Ltd.

Key milestones

1965 ● Incorporated in Mumbai as Needle Roller Bearing Company; an Indo-French joint venture with Nadella – France

(Timken)

1966 ● Set up the first plant in Thane, Mumbai, to produce needle-roller bearings

1980 ● New plant set up in Chikalthana, Aurangabad, for needle rollers

1982 ● New plant set up in Jalna, Aurangabad, to produce cylindrical roller bearings, ball bearings, spherical roller

bearings, tapered roller bearings

1990 ● Name changed to NRB Bearings

1991 ● New plant set up in Waluj, Aurangabad

1995 ● Listed on the BSE

2000 ● Listed on the NSE

● Acquired Shriram Needle Bearings Industries Ltd (SNL)

● Set up an R&D centre in the Thane plant

2005 ● Promoters of NRB Bearings bought Timken’s stake

2008 ● NRB established a wholly owned subsidiary NRB Bearings Thailand Ltd

● New plant set up in Pantnagar, Uttarakhand

2012 ● Demerged NRB Industrial Bearings as a part of a family settlement

2015 ● NRB Bearings Europe GmbH was set up with a view to increase exports to Europe

Source: Company

Top fourth largest bearing

company in India (organised), in

terms of sales

It has a product range of over

3,000 different sizes of bearings

21

Annexure: Financials


Income statement Balance Sheet

(₹ mn) FY15 FY16 FY17E FY18E FY19E (₹ mn) FY15 FY16 FY17E FY18E FY19E

Operating income 6,685 6,726 7,348 8,205 9,296 Liabilities

EBITDA 1,261 1,133 1,256 1,452 1,695 Equity share capital 194 194 194 194 194

EBITDA margin 18.9% 16.8% 17.1% 17.7% 18.2% Reserves 2,353 2,614 2,969 3,368 3,852

Depreciation 310 319 336 357 384 Minorities 24 24 30 37 45

EBIT 951 813 920 1,095 1,311 Net worth 2,571 2,832 3,193 3,598 4,091

Interest 194 185 146 141 133 Convertible debt - - - - -

Operating PBT 757 629 774 954 1,178 Other debt 3,273 3,107 3,007 2,907 2,707

Other income 45 26 39 44 37 Total debt 3,273 3,107 3,007 2,907 2,707

Exceptional inc/(exp) (2) (13) 49 - - Deferred tax liability (net) 120 117 117 117 117

PBT 800 641 862 997 1,215 Total liabilities 5,964 6,056 6,317 6,622 6,915

Tax provision 263 210 266 326 400 Assets

Minority interest 12 5 6 7 8 Net f ixed assets 2,569 2,581 2,533 2,651 2,762

PAT (Reported) 525 427 591 665 807 Capital WIP 203 121 71 46 21

Less: Exceptionals (2) (13) 49 - - Total fixed assets 2,772 2,701 2,604 2,697 2,782

Adjusted PAT 527 440 541 665 807 Investments 2 8 8 8 8

Current assets

Ratios Inventory 1,642 1,447 1,812 2,001 2,190

FY15 FY16 FY17E FY18E FY19E Sundry debtors 2,120 2,284 2,374 2,579 2,868

Growth Loans and advances 2,037 2,222 2,239 2,500 2,833

Operating income (%) 9.7 0.6 9.3 11.7 13.3 Cash & bank balance 278 313 545 468 321

EBITDA (%) 17.3 (10.2) 10.9 15.6 16.7 Marketable securities 1 1 1 1 1

Adj PAT (%) 58.6 (16.5) 23.0 22.8 21.5 Total current assets 6,078 6,266 6,970 7,548 8,212

Adj EPS (%) 58.6 (16.5) 23.0 22.8 21.5 Total current liabilities 2,901 2,933 3,279 3,644 4,101

Net current assets 3,177 3,334 3,691 3,904 4,111

Profitability Intangibles/Misc. expenditure 14 14 14 14 14

EBITDA margin (%) 18.9 16.8 17.1 17.7 18.2 Total assets 5,964 6,056 6,317 6,622 6,915

Adj PAT Margin (%) 7.9 6.5 7.4 8.1 8.7

RoE (%) 22.0 16.3 18.0 19.6 21.0 Cash flow

RoCE (%) 16.9 13.8 15.2 17.2 19.7 (₹ mn) FY15 FY16 FY17E FY18E FY19E

RoIC (%) 14.3 11.7 13.0 14.7 15.8 Pre-tax profit 802 654 813 997 1,215

Total tax paid (266) (212) (266) (326) (400)

Valuations Depreciation 310 319 336 357 384

Price-earnings (x) 19.7 23.6 19.2 15.6 12.9 Working capital changes (334) (122) (126) (289) (354)

Price-book (x) 4.0 3.7 3.3 2.9 2.5 Net cash from operations 513 639 758 739 845

EV/EBITDA (x) 10.6 11.7 10.2 8.9 7.6 Cash from investments

EV/Sales (x) 2.0 2.0 1.8 1.6 1.4 Capital expenditure (218) (249) (239) (450) (469)

Dividend payout ratio (%) 27.7 33.5 33.2 33.2 33.2 Investments and others (0) (6) - - -

Dividend yield (%) 1.4 1.4 1.9 2.1 2.6 Net cash from investments (219) (255) (239) (450) (469)

Cash from financing

B/S ratios Equity raised/(repaid) - - - - -

Inventory days 128 107 123 123 120 Debt raised/(repaid) 111 (166) (100) (100) (200)

Creditors days 74 72 75 76 76 Dividend (incl. tax) (175) (174) (236) (266) (323)

Debtor days 109 114 111 108 106 Others (incl extraordinaries) (7) (10) 49 0 -

Working capital days 149 151 148 144 140 Net cash from financing (72) (350) (287) (366) (523)

Gross asset turnover (x) 1.2 1.2 1.2 1.3 1.3 Change in cash position 222 34 232 (77) (147)

Net asset turnover (x) 2.7 2.6 2.9 3.2 3.4 Closing cash 278 313 545 468 321

Sales/operating assets (x) 2.4 2.5 2.8 3.1 3.4

Current ratio (x) 2.1 2.1 2.1 2.1 2.0

Debt-equity (x) 1.3 1.1 0.9 0.8 0.7

Net debt/equity (x) 1.2 1.0 0.8 0.7 0.6 Quarterly financials (Standalone)

Interest coverage (₹ mn) Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17

EBIT/Interest (x) 4.9 4.4 6.3 7.8 9.8 Net Sales 1,681 1,588 1,724 1,746 1,797

EBITDA/Interest (x) 6.5 6.1 8.6 10.3 12.7 Change (q-o-q) 5.1 (5.5) 8.6 1.3 2.9

EBITDA 308 203 309 293 283

Per share Change (q-o-q) 32.9 (34.3) 52.3 (4.9) (3.4)

FY15 FY16 FY17E FY18E FY19E EBITDA margin 18.3 12.8 17.9 16.8 15.8

Adj EPS (₹) 5.4 4.5 5.6 6.9 8.3 PAT 157 78 120 141 164

CEPS (₹) 8.6 7.8 9.1 10.5 12.3 Adj PAT 157 78 120 141 164

Book value (₹) 26.5 29.2 32.9 37.1 42.2 Change (q-o-q) 48.9 (50.3) 53.9 17.6 16.0

Dividend (₹) 1.5 1.5 2.0 2.3 2.8 Adj PAT margin 9.3 4.9 7.0 8.1 9.1

Actual o/s shares (mn) 96.9 96.9 96.9 96.9 96.9 Adj EPS 1.6 0.8 1.2 1.5 1.7

22

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CRISIL Research Team

Senior Director

Nagarajan Narasimhan CRISIL Research +91 22 3342 3540 [email protected]

Analytical Contacts

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Binaifer Jehani Director, Customised Research +91 22 3342 4091 [email protected]

Manoj Damle Director, Customised Research +91 22 3342 3342 [email protected]

Jiju Vidyadharan Director, Funds & Fixed Income Research +91 22 3342 8091 [email protected]

Ajay Srinivasan Director, Industry Research +91 22 3342 3530 [email protected]

Rahul Prithiani Director, Industry Research +91 22 3342 3574 [email protected]

Bhaskar S. Bukrediwala Director +91 22 3342 1983 [email protected]

Miren Lodha Director +91 22 3342 1977 [email protected]

Business Development

Prosenjit Ghosh Director, Industry & Customised Research +91 99206 56299 [email protected]

Megha Agrawal Associate Director +91 98673 90805 [email protected]

Neeta Muliyil Associate Director +91 99201 99973 [email protected]

Dharmendra Sharma Associate Director (North) +91 98189 05544 [email protected]

Ankesh Baghel Regional Manager (West) +91 98191 21510 [email protected]

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Sarrthak Sayal Regional Manager (North) +91 95828 06789 [email protected]

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About CRISIL Research

CRISIL Research is India's largest independent integrated research house. We provide insights, opinion and analysis on the Indian

economy, industry, capital markets and companies. We also conduct training programs to financial sector professionals on a wide array

of technical issues. We are India's most credible provider of economy and industry research. Our industry research covers 86 sectors

and is known for its rich insights and perspectives. Our analysis is supported by inputs from our network of more than 5,000 primary

sources, including industry experts, industry associations and trade channels. We play a key role in India's fixed income markets. We

are the largest provider of valuation of fixed income securities to the mutual fund, insurance and banking industries in the country. We

are also the sole provider of debt and hybrid indices to India's mutual fund and life insurance industries. We pioneered independent

equity research in India, and are today the country's largest independent equity research house. Our defining trait is the ability to

convert information and data into expert judgements and forecasts with complete objectivity. We leverage our deep understanding of

the macro-economy and our extensive sector coverage to provide unique insights on micro-macro and cross-sectoral linkages. Our

talent pool comprises economists, sector experts, company analysts and information management specialists.

CRISIL Privacy

CRISIL respects your privacy. We use your contact information, such as your name, address, and email id, to fulfil your request and service

your account and to provide you with additional information from CRISIL and other parts of S&P Global Inc. and its subsidiaries (collectively, the

“Company”) you may find of interest.

For further information, or to let us know your preferences with respect to receiving marketing materials, please visit www.crisil.com/privacy. You

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Last updated: April 2016

Analyst Disclosure

Each member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict of interest that can bias

the grading recommendation of the company.

Disclaimer:

This Company commissioned CRISIL IER report is based on data publicly available or from sources considered reliable. CRISIL Ltd. (CRISIL)

does not represent that it is accurate or complete and hence, it should not be relied upon as such. The data / report is subject to change without

any prior notice. Opinions expressed herein are our current opinions as on the date of this report. Nothing in this report constitutes investment,

legal, accounting or tax advice or any solicitation, whatsoever. The subscriber / user assume the entire risk of any use made of this data / report.

CRISIL especially states that, it has no financial liability whatsoever, to the subscribers / users of this report. This report is for the personal

information only of the authorised recipient in India only. This report should not be reproduced or redistributed or communicated directly or

indirectly in any form to any other person – especially outside India or published or copied in whole or in part, for any purpose. As per CRISIL’s

records, none of the analysts involved has any ownership / directorship in the company. However CRISIL or its associates may have

commercial transactions with the company.

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CRISIL IER · PDF fileDCF-based fair value to ₹143. ... India Ltd Mahindra and ... because...

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