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Transcript of CRISIL-Research CRISIL-Research_ier-report-nrb bearings ltdIer-report-nrb Bearings Ltd 2015

  • RESEARCH

    CRISIL IER Independent Equity Research

    Detailed Report

    NRB Bearings Ltd

    Enhancing investment decisions

  • CRISIL IER Independent Equity Research

    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 (

  • RESEARCH

    NRB Bearings Ltd

    Finding its bearings

    Fundamental Grade 4/5 (Superior fundamentals)

    Valuation Grade 3/5 (CMP is aligned)

    Industry Auto Components

    1

    December 30, 2015

    Fair Value 127 CMP 138

    For detailed initiating coverage report please visit: www.ier.co.in

    NRB Bearings Ltd. (NRB) is the fourth largest organised bearings player in India with nearly 13% market share. The company has been focusing on increasing longevity of its business by becoming a preferred supplier to domestic and global original equipment manufacturers (OEMs). Its relationship with global OEMs will bear fruit once they expand operations in India. With its technological capabilities and long-standing relationships in a niche segment, NRB is a proxy play on the automobile sector, which is expected to pick up in H2FY16. We have lowered our revenue and earnings estimates for FY16-17 to factor in the delay in demand recovery. However, since the companys long-term growth prospects are intact, we maintain the fundamental grade of 4/5.

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

    Integrated operations with an export focus to augur well NRBs product portfolio of highly customised precision bearings, developed in conjunction with OEMs, ensures client loyalty. This has enabled the company to grow along with OEMs, as the auto sector sees a revival in demand, especially in passenger vehicles (PV) and commercial vehicles (CV) segments. With demand for two-wheelers and tractors expected to pick up in H2FY15, NRB is likely to benefit from the growth in the auto sector. New products, coupled with strategic partnerships, are likely to result in significant value accretion over the long run.

    Margin correction in Q4FY15 and Q1FY16 is a blip expect recovery in H2FY16 NRBs high operating leverage, in conjunction with a fall in raw material prices, caused EBITDA margin to expand 121 bps y-o-y to 18.9% in FY15. However, in Q4FY15 and Q1FY16, EBITDA margin contracted primarily due to imposition of the safeguard duty (explained on page 9). We expect margin to recover H2FY16 onwards, led by growth in revenue and lower raw material cost. We estimate EBITDA margin at 18.1% in FY16 and 19% in FY17.

    Risk: Dependence on domestic OEM segment NRB is dependent on the domestic auto market (~63% of FY15 revenue), which is susceptible to cyclicality. The company is focusing on exports to mitigate this risk.

    Revenue and earnings estimates lowered; fair value maintained at 127 We maintain our discounted cash flow (DCF)-based fair value is maintained at 127. The fair value implies P/E multiples of 21.5x FY16E and 16.5x FY17E EPS. At the current market price of 138, the valuation grade is 3/5.

    KEY FORECAST

    ( mn) FY13 FY14 FY15 FY16E FY17E

    Operating income 5,912 6,093 6,685 7,294 8,278 EBITDA 1,071 1,075 1,261 1,321 1,571 Adj net income 449 332 534 572 746 Adj EPS () 4.6 3.4 5.5 5.9 7.7 EPS growth (%) (10.3) (26.0) 60.8 7.2 30.3 Dividend yield (%) 1.2 0.8 1.1 1.4 1.9 RoCE (%) 15.6 14.3 16.9 16.8 20.2 RoE (%) 20.7 15.8 22.3 20.8 23.7 PE (x) 29.8 40.3 25.0 23.4 17.9 P/BV (x) 6.7 6.0 5.2 4.6 4.0 EV/EBITDA (x) 15.0 15.3 13.0 12.2 10.2

    CMP: Current market price

    Source: Company, CRISIL Research estimates

    CFV MATRIX Excellent

    Fundamentals

    KEY STOCK STATISTICS NIFTY/SENSEX 7896/25970 NSE/BSE ticker NRBBEARING Face value ( per share) 2 Shares outstanding (mn) 96.9 Market cap ( mn)/(US$ mn) 13,375/201 Enterprise value ( mn)/(US$ mn) 16,129/243 52-week range ()/(H/L) 173/95 Beta 1.0 Free float (%) 42.9% Avg daily volumes (30-days) 108,232 Avg daily value (30-days) ( mn) 15.8

    SHAREHOLDING PATTERN

    PERFORMANCE VIS--VIS MARKET

    Returns

    1-m 3-m 6-m 12-mNRB -8% 16% 30% 10%NIFTY 500 0% 1% -3% -1%

    ANALYTICAL CONTACT Bhaskar Bukrediwala bhaskar.bukrediwala@crisil.com Hemali Dhame hemali.dhame@crisil.com Sayan Das Sharma sayan.sharma@crisil.com

    Client servicing desk +91 22 3342 3561 clientservicing@crisil.com

    4

    3

    2

    1

    1 2 3 4

    5

    Valuation Grade

    Fund

    amen

    tal G

    rade

    5Poor Fundamentals

    Stro

    ngDo

    wns

    ide

    Stro

    ngUp

    side

    58.6% 58.2% 57.2% 57.2%

    11.6% 11.7% 12.0% 11.8%

    13.5% 14.2% 15.5% 16.3%

    16.3% 15.9% 15.4% 14.7%

    0%10%20%30%40%50%60%70%80%90%

    100%

    Dec-14 Mar-15 Jun-15 Sep-15Promoter FII DII Others

  • CRISIL IER Independent Equity Research

    2

    Table 1: NRB Bearings - business environment Domestic (OEM) Exports Aftermarket

    (replacement) Revenues contribution - FY15 62.9% 24.1% 13.0% Revenues contribution - FY16E 62.5% 24.7% 12.7% Sales CAGR (FY13-15) 4.9% 12.4% 2.8% Sales CAGR (FY13-16E) 12.4% 17.6% 10.0% Key products/ service offering Big end bearings

    Bush bearings Crank pins Cylindrical bearings Specialised ball bearings Steering column bearings Tapered roller 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 Crank pins

    Key customers Ashok Leyland Ltd Bajaj Auto Ltd Hero MotoCorp Ltd Honda Motorcycle & Scooters

    India Ltd Mahindra and Mahindra Ltd Tata Motors Ltd

    Daimler Trucks Getrag Transmissions Corporation

    (Worlds largest supplier of transmission systems to passenger /commercial vehicles)

    GKN Driveline (European automotive and aerospace player)

    Renault Volvo (European truck manufacturer)

    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 in 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

    Note: SKF India, FAG Bearings India and global peers such as Timken (the US) and SKF have financial year-ending in December. Source: Company, CRISIL Research Needle roller bearings (~47% of revenue)

    Bearing is a machine element used to support load and reduce friction in moving parts. The bearings industry is classified under a) bimetal bearings and

    b) anti-friction bearings (which include ball and roller bearings). The rolling element acts as a differentiator in a bearing. The choice of bearing primarily

    depends on revolutions per minute (RPM) and load. Needle roller bearings are typically customised as against ball bearings, which are generally off-

    the-shelf.

    Needle roller bearings are used in medium RPM, high-load requirements, while ball bearings are used in high RPM, medium-load requirements.

    For compact size applications such as two-wheeler machinery, needle roller bearings are preferred.

  • RESEARCH

    NRB Bearings Ltd

    Grading Rationale Figure 1: Revenue mix FY15

    Export, 24%

    Aftermarket,

    13%

    Domestic(OEM63%)

    Growth moderated towards tail-end of FY15, to recover in FY16 As a well-established manufacturer of customised bearings for the mobility segment, NRBs

    performance is inextricably linked to growth in demand for automobiles, tractors and off-the-

    highway vehicles. In that context, FY15 was a mixed bag robust H1FY15 and a relatively

    weaker H2FY15, reflecting ups and downs of the domestic auto sector.

    The company derives ~48% of its domestic OEM revenue from two-wheelers, a segment that

    has slowed down considerably largely due to weak rural demand. Further, export revenue

    was adversely impacted by a sharp depreciation in the euro in Q4FY15. Total revenue in

    FY15 grew 9.7% y-o-y to 6.7 bn, driven by revenue growth of 10% in the domestic OEM

    segment, 14% in exports and 6% in growth in the aftermarket segment (all in y-o-y terms).

    Two-wheelers account for ~48% of

    domestic OEM revenues

    In line with trends seen at the tail-end