NRB Bearings Ltd Accumulatebreport.myiris.com/KJMC/NRBBEARI_20110412.pdf · bearings in India....

1 NRB Bearings Ltd.

0

Bearings NRB Bearings Ltd Accumulate

CMP Rs 51

Target Price Rs 60

Key Data

Face value 2 Market cap (Rs in mn) 4,941.9 Total O/S shares (in mn) 96.9 Free Float 26.39% 52 week High/Low 65/36 Avg. Monthly Volume (BSE) 14481 Avg Monthly volume (NSE) 31036 BSE Code 530367 NSE Code NRBBEARING Bloomberg code NRBBR IN Beta 0.83 Date of Incorporation 1965 Last Dividend Declared 100% Six month's return -5.51% Indices BSE B FCCB's O/s N.A. WarrantsO/s N.A.

One Year Price Chart

0

10

20

30

40

50

60

70

Apr-10 May-10 Jul-10 Aug-10 Sep-10 Nov-10 Dec-10 Feb-11 Mar-11050000100000150000200000250000300000350000400000450000

Closing Price Volume

Source: Capitaline

Share Holding Pattern 31-12-2010

Banks/MF's/Institutions/Ins4.6%

Public & Others6.9%FII's

8.1%

Non Promoters (Body Corporate)

6.8%

Promoters 73.6%

Source: Company, KJMC Research

Shefali Doshi Research Analyst Phone-022 4094 5500 Ext. 202 Email: [email protected]

NRB bearings, set up in 1965 is the first company to manufacture Needle Roller bearings in India. Moving in line with the advanced technologies NRB has wide range of products to be offered in various product categories like Needle Roller bearings, Needle bushes & cages, cylindrical roller bearings, ball bearings, taper roller bearings, spherical roller bearings etc. We expect the consolidated net sales, EBITDA & PAT to grow at a CAGR of 23.5%, 40.0% & 61.0% during FY10‐FY13E. EBITDA margins are likely to improve and remain above 20% and PAT margins to remain above 10%. At CMP of Rs 51, stock is currently trading at PE of 9.1x & 7.7x its FY11E & FY12E earnings of Rs 5.6 & Rs 6.6 respectively. We initiate coverage with “Accumulate” recommendation and a target price of Rs 60 which is 9.0 x FY12E earnings of Rs 6.6. The target price translates into a potential upside of 18%.

Key Highlights

Enjoys 70% market share in Needle bearings NRB is the major player in the Needle bearing segment and had been the first company to manufacture Needle Roller bearings in India. The Needle roller bearing is the flagship product of the company and currently NRB enjoys a market share of 70% in the needle bearings segment.

Increasing R & D spends & capacity expansions to drive growth in future. NRB’s spending on R&D has grown at a CAGR of 20.0% during FY07‐10. During FY10, the company had incurred Rs 28.35 mn towards R& D. Consistent R & D activities has enabled NRB to design products which meet the environmental norms in Europe & America thereby improving the company’s revenues.

Increased spending on infrastructure by Govt. of India to leverage growth In order to achieve a GDP growth of above 8% development of high quality physical infrastructure, such as roads, ports, airports and railways is essential. According to the ACMA‐EY Vision 2020 Auto Component, industry is expected to grow five‐fold by 2020 to cross Rs 5 lakh crore and is likely to contribute 3.6% to GDP from the current 2.1%.

Highest dividend payout amongst the peers Since 2006 NRB bearings has maintained the dividend payout ratio of above 35%.During FY10 it had declared 100% dividend with a payout ratio of 42.5%. This dividend payout of above 35% led by strong growth in profit has remained highest in the industry. The healthy dividend payout has helped the company to maintain an equally healthy ROE. We expect the ROE of the company to remain above 25% during FY11E ‐13E.

Consollidated Financial Snapshot (Rs in mn)

Particulars FY09 FY10 FY11E FY12E FY13E

Net Sales 2,920.2 3,526.8 4,757.0 5,669.8 6,637.3

growth % -11.1% 20.8% 34.9% 19.2% 17.1%

EBITDA 326.3 549.4 1,056.1 1,287.0 1,506.7

EBITDA margins % 11.2% 15.6% 22.2% 22.7% 22.7%

PAT 125.2 199.2 545.1 643.3 831.9

PAT margins% 4.3% 5.6% 11.5% 11.3% 12.5%

EPS 0.3 2.2 5.6 6.6 8.6

P/E(x) 165.5 22.7 9.1 7.7 5.9

EV/EBITDA 11.8 6.1 6.2 5.1 4.2

ROE% 1.8% 12.7% 28.4% 28.1% 29.7%


12th April 2011 Initiating Coverage

2 NRB Bearings Ltd.

Disclaimer / Important disclosures KJMC CAPITAL MARKET SERVIES LIMITED is a full service, stock broking company, and is a member of BSE (Bombay Stock Exchange Ltd., and NSE (National Stock Exchange of India Ltd., KJMC group and its officers, directors, and employees, including the analyst(s), and others involved in the preparation or issuance of this material and their dependants, may on the date of this report or from, time to time have “long” or “short” positions in, act as principal in , and buy or sell the securities or derivatives thereof of companies mentioned herein. Or sales people, dealers, traders and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinion expressed herein. KJMC group may have earlier issued or may issue in future reports on the companies covered herein with recommendations/information inconsistent or different from those made in this report. In reviewing this document, you should be aware that any or all of the foregoing, among other things, might give rise to potential conflicts of interest. KJMC group may rely on information barriers, such as “Chinese Walls” to control the flow of information contained in one or more areas with in KJMC group into other areas, units, groups or affiliates of KJMC Group.KJMC group and its associates may in past, present or future have investment banking/advisory relationship with companie(s) mentioned herein. The projections and forecasts described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. Projections and forecasts are necessarily speculative in nature, and it can be expected that one or more of the estimates on which the projections and forecasts were based will not materialize or will vary significantly from actual results, and such variances will likely increase over time. All projections and forecasts described in this report have been prepared solely by the analyst of this report independently of the KJMC Group. These projections and forecasts were not prepared with a view toward compliance with published guidelines or GAAP. You should not regard the inclusion of the projections and forecasts described herein as a representation or warranty by or on behalf of the KJMC Group, or specifically KJMC CAPITAL MARKET SERVICES LIMITED, or the analysts or any other person that these projections or forecasts or their underlying assumptions will be achieved. For these reasons, you should only consider the projections and forecasts described in this report after carefully evaluation all the information in this report, including the assumptions underlying such projections and forecasts. This report is for information purposes only and this document/material should not be construed as an offer to sell or the solicitation of an offer to buy, purchase or subscribe to any securities, and neither this document nor anything contained herein shall form the basis of or be relied upon in connection with any contract or commitment whatsoever. The price and value of the investments referred to in this document/material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance. Future returns are not guaranteed and a loss of original capital may occur. Actual results may differ materially from those set forth in projections. Forward‐looking statements are not predictions and may be subject to change without notice. KJMC Group and its affiliates accept no liabilities for any loss or damage of any kind arising out of the use of this report. This report/document has been prepared by the KJMC Group based upon information available to the public and sources, ( including company sources) believed to be reliable. Though utmost care has been taken to ensure its accuracy, no representation or warranty, express or implied is made that it is accurate or complete. KJMC Group or specifically KJMC Capital Market Services Ltd., has reviewed the report and, in so far as it includes current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed. This information herein was obtained from various sources; we do not guarantee its accuracy or completeness. This document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific persons who may receive this document and should understand that statements regarding future prospects many not be realized. Investors should note that income form such securities, if any, may fluctuate (both downside or upside), and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance.

Analyst Certification I hereby certify that the views expressed in this document reflect my personal views. I also certify that no part of my respective compensation was, is, or will be, directly or indirectly, related to the views expressed in this document. I do not own any amount of stock in the company recommended/covered in this report.

General data sources Company, Capitaline, Public domain, Bloomberg.

3 NRB Bearings Ltd.

Contents

Investment Rationale ............................................................................... 4

Risk & Concern.......................................................................................... 8

Company Background ............................................................................. 9

Industry .................................................................................................... 11

Peer Comparison..................................................................................... 12

Outlook & Valuation .............................................................................. 12

Financial Analysis................................................................................... 13

Quarterly performance........................................................................... 14

Financial Summary................................................................................. 16

4 NRB Bearings Ltd.

Investment Rationale

Enjoys 70% market share in Needle bearings The estimated size of the organized bearing industry is worth Rs 50,000 mn and NRB has a market share of about 10% of the total bearing industry. Being a major player in the needle bearing segment, NRB has been the first company to manufacture Needle Roller bearings in Inda. The Needle roller bearing is the flagship product of the company and currently NRB enjoys a market share of 70% in the organized needle bearings segment with rest 30% being contributed by imports and other players. Ball & roller bearings constitutes around 40%‐45% of the total revenues of the company. NRB is considered to be the one stop shop for bearings of different variety.

Market share in Needle bearings Industry wise revenue break up

NRB, 70%

Others & imports,

30%

NRB Others & imports

70%

10%

20%

Auto Industrial Replacement


NRB offers over 3000 customized products to its diversified client base in the Auto OEM’s and after market segments. The bearings manufactured by NRB finds applications in Auto, tractors & farm equipments & Off highway vehicles. Currently 70% of the revenues are derived from Auto OEM’s, 10% from the industrial segment whereas the balance 20% of the revenue is contributed by the after market segment.

Reputed clientele Tata Motors, Hero Honda, Bajaj Auto, Ashok Ley land are some of the OEM’s in its client portfolio. The client portfolio is well diversified with no single customers contributing more then 10% to the total revenues. Almost 80% of Tata Motors requirements is supplied by NRB whereas Hero Honda sources 100% of its requirements from NRB.

In the Industrial segment, it has some of the reputed clients like ABB, LMW, Siemens, Punjab ball bearings, Class India, Standard Corporation in its portfolio. NRB also has a good market in exports, which contributes around 10% to the revenues. The products are having good demand in the European markets like Germany, Sweden & France. Mercedes, Ingersol, Daimler, Volvo, ZF are some of the clients in the international markets.

Increasing R & D spends & capacity expansion to drive growth in future

NRB’s spending on R&D have grown at a CAGR of 20% during FY07‐10.The speicifc areas where the company spends on R & D includes i) Product development, ii)Improvement in design process & iii) low cost automation.

NRB enjoys a market share of 70% in the needle bearings…

5 NRB Bearings Ltd.

R& D expenses during FY07-10

Particulars FY07 FY08 FY09 FY10

Net sales 3104.7 3285.9 2920.2 3526.8

R&D 16.4 20.0 25.1 28.4

R& D as a % of sales 0.5% 0.6% 0.9% 0.8%

Sources: Company, KJMC Research During FY10, the company had incurred Rs 28.35 mn towards R&D as a result of which NRB was able to gain substantial benefit in terms of

i) New product development witnessing substantial increase with a specific focus on exports

ii) Meeting environmental norms in Europe & America

iii) Improvement in the quality of design and reduced design cycle.

iv) Implementing auto‐feeding systems, auto detection of missing components & loading unloading of components

Y-o-Y growth% in Sales Vis-a Vis R&D spends - FY10 RD as a % of Sales – FY10

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

ABCBearings

BimetalBearings

FagBearings

NRBBearings

SKF India TimkenIndia

y-o-y growth% R & D spends y-o-y growth% sales

02000400060008000

1000012000140001600018000

ABCBearings

BimetalBearings

FagBearings

NRBBearings

SKFIndia

TimkenIndia

Rs

mn

0.0%0.1%0.2%0.3%0.4%0.5%0.6%0.7%0.8%0.9%

Net sales R& D as % of sales

Source: Company, KJMC Research The R& D spends of NRB for FY10 remained at 0.8% of Net sales, which was highest amongst its peers. The growth in company’s revenues was driven by volumes and new product developments as a result of R & D.

Growth in installed capacity Vis - a - Vis production and sales during FY08-FY10 Ball & Roller Bearings Needle Roller Bushes & Cages

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

FY08 FY09 FY10

Installed capacity (nos.) Production (nos.) Sales(nos.)

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

FY08 FY09 FY10

Installed capacity (nos.) Production (nos.) Sales(nos.)


6 NRB Bearings Ltd.

During FY08 & FY09 the aftermath of the global financial crisis were felt in Indian markets also, though it remained for a limited period. High inflation in the domestic markets, uncertainty in the job markets, higher interest rates, etc negatively impacted the automotive segment due to sluggish demand.

Hence, inspite of 11% increase in the installed capacity for bearings, bushes & cages during FY08 & increased R & D expenses, which were up by 22%, the growth in sales for FY08 & FY09 has not remained at par with the capacity expansion and higher R & D spends.

Yearly growth in Sales & R & D during FY08-10

5.8%

-11.1%

20.8%22.2%25.2%

12.9%

-15.0%-10.0%

-5.0%0.0%5.0%

10.0%15.0%20.0%25.0%30.0%

FY08 FY09 FY10

Sales R &D Source: Company, KJMC Research

However, during FY10 net sales reported a higher 20.8% growth. The growth in net sales outpaced the growth for last 2 years

NRB’s current areas for R & D include reducing the product development cycle and developing products that are aimed at reducing power losses. We believe that the company’s thrust on R& D will put NRB in higher growth trajectory in terms of revenue and higher margins as compared to its peers.

Capacity expansion on the anvil NRB is also planning to further expand its capacity in various product lines that will happen over a period of next 2‐3 years in a phased manner.

Thailand plant to commence manufacturing operations

NRB’s Thailand plant is expected to start manufacturing operations during FY11‐12 with an estimated turnover of Rs 100‐120 mn. The Thailand plant will be a gateway for exports to the ASEAN region. The initial installed capacity is likely to be around 32 mn bearings annually and the total investment is estimated to be at Rs 400 mn. NRB is looking at opportunities in the one‐tonner pickups and two wheelers .It will be facing competition from Toyota, Isuzu, Nissan & General Motors in the pick up segment and Honda, Yamaha in the two‐wheeler space. NRB is looking at capitalizing the opportunities thrown by Indian vehicle manufacturers setting up facilities in ASEAN region. The Thailand plant may also focus on non‐automotive business and likely to manufacture spares for textile machinery.

We believe that the company’s continued spending on R & D, capacity expansions in past and further capacity expansion in future will help in scaling new highs in terms of revenues over a period of next 2‐3 years.

Company’s thrust on R& D will put NRB in higher growth trajectory……

7 NRB Bearings Ltd.

Increased spending on infrastructure by Govt. of India to leverage growth: In order to achieve a GDP growth of above 8%, developing high quality physical infrastructure, such as roads, ports, airports and railways is essential. Budget 2011 – 12 has proposed various measures to maintain the thrust for upgrading infrastructure in both rural and urban areas and has allocated Rs.2, 14,000 crore, which is higher by 23.3% and accounts for over 48.5 per cent of the total plan allocations, for infrastructure development in the country.

To give a boost to infrastructure development in railways, ports, housing and highways development, Budget 2011‐12 has proposed to allow tax free bonds of 30,000 crore to be issued by various Government undertakings. Budget 2011‐12 has also proposed to raise the corpus of RIDF XVII to Rs 18,000 crs in 2011‐12 from Rs 16,000 crs in current year. The Indian automobile market is the second fastest growing in the world and has shown health growth of above 25 per cent this year. To provide green and clean transportation for the masses, Budget 2011 has proposed to launch National Mission for Hybrid and Electric Vehicles .

Domestic sales trend for 2010 -11

Particulars % growth 2010-11 over 2009-10 Passenger cars 29.0% Commercial vehicle 27.0% Two wheelers 25.8% Three wheelers 19.4%

Source: SIAM

Vision 2020

Auto Component industry is expected to grow five‐fold by 2020 to cross Rs 5 lakh crore and is likely to contribute 3.6% to GDP from the current 2.1%.

According to the ACMA‐EY Vision 2020 study, India is expected to witness strong growth in vehicle production across all segments by 2020.

Passenger vehicles ‐ projected to be 5 million units by 2015 and over 9 million by 2020 driven by domestic demand and as a global hub for exports of small cars

Commercial vehicles – volumes of over 1.4 million by 2015 and over 2.2 million by 2020. Small Commercial Vehicles (SCV), a relatively new segment, expected to grow 28% annually over the next few years

Two and three wheelers – expected to double to 22 million units by 2015 and reach 30 million by 2020 driven by low penetration levels, expanding rural sales and growth in exports

Tractors – projected to be over 0.7 million by 2015 and over 1 million by 2020 with steady growth expected in domestic and export volumes

Construction equipment – likely to grow 2.5 times to 0.1million units by 2015 and almost double to 0.18 million by 2020 driven by the infrastructure sector.

Established players like NRB with a considerable presence are well placed to capture the huge growth opportunities.

Auto Component industry likely to contribute 3.6% to GDP from the current 2.1%........

8 NRB Bearings Ltd.

Highest dividend amongst its peers

Since 2006 NRB, bearings have maintained the dividend payout ratio of above 35%.

During FY10, it had declared 100% dividend with a payout ratio of 42.5%. This dividend payout of above 35% is also highest in the industry, which is evident from table.

Peers dividend payout - FY10 NRB dividend payout FY08-13E

45

80

45

100

40

23.26

42.526.42 36.34

11.64

0

20

40

60

80

100

120

ABCBearings

BimetalBearings

FagBearings

NRBBearings

SKF India

%

Dividend% Payout%

0

20

40

60

80

100

120

140

FY08 FY09 FY10 FY11E FY12E FY13E0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Dividend (%) Payout (%)


We expect NRB to continue this trend of maintaining the payout ratio of above 35% in future as well. This will also result in improving the ROE of the company. We expect the ROE of the company to remain above 25% during FY11E ‐ 13E.

Risk and concerns

Presence of unorganized players in the after market segments poses a big threat for the industry.

Threat of import duty removal which stands at 60% on CKD units and 106% on completely built units.

India becoming a major auto hub attracting global players all over the world which may intensify competition.

Rising interest cost could dampen the growth in the major user industries such as auto and after markets in turn.

Subject to volatility in the price of its major raw material ie steel.

9 NRB Bearings Ltd.

Company Background

NRB bearings, is the first company to manufacture Needle Roller bearings in India. Moving in line with the advanced technologies NRB has wide range of products to be offered in various product categories like Needle Roller bearings, Needle bushes & cages, cylindrical roller bearings, ball bearings, taper roller bearings, spherical roller bearings etc.

The company has been promoted by Mr Trilochan Singh Sahney, M.A. from Mumbai University.Mr Trilochan Singh has remained the President of the Ball & Roller Bearings Manufacturers Association of India during 1972‐73, 1976‐78, 1985‐86, 1993‐94.He has the privilege of being a member of the governing council of Indo –French Chamber of Commerce from its inception

Top Management Name Designation Independent / Non-Independent Trilochan Singh Sahney Executive Chairman Non-Independent P D Ojha Director Independent Kala S Pant Director Independent Harshbeena S Zaveri Managing Director Non-Independent Devesh S Sahney Director Non-Independent K M Elavia Director Independent Anand N Desai Additional Director Satish C Rangani Senior Vice President & CS

Sources: Company, KJMC Research

Plant locations

Place Year of establishment Products manufactured

Thane 1966 Textile bearing, Thrust bearing, steering bearing ,Needle bushes, Needle cages

Aurangabad 1978 Needle rollers

Jalna 1982 Rocker arm bearings, Textile bearings, Taper roller bearings, Ball bearings,Cylinderical ball bearings,Spherical ball bearings

Ranchi 1983 Needle rollers , Needle cages, Full compliment shell bearings

Waluj 1991 Big end bearings, Small end bearings, Grease retained bushes, Full complimented bushes

Hyderabad 1992 Thrust bearings, on rod kits, Cages

Pantnagar 2008 Ball bearings, Needle roller bearings, Cylindrical roller bearings

Thailand 2007 Spherical bearings, Tapered bearings, Cylindrical roller bearings , Needle cages, Roller cages, Bearings for textile application


10 NRB Bearings Ltd.

25%

73%

2%

Components steel Brass

23%

1%5%

6% 12%

10%

43%

Raw Material Stores spares Processing Charges

Pow er and Fuel Repair & Maintenace Employee Expenses

Other Expenses

Break up of raw materials Break up of cost


User Industry

Automotive Tractors & farm

equipment

Off Highway Agency Division

2/3 wheeler Passenger car

Commercial vehicle


Industry

The Indian bearing industry is likely to grow at a CAGR of 15% for next 3 years. Of the total bearing industry which is estimated to be around 100,000 mn, 50% is contributed by the organized players and the rest 50% is contributed by the unorganized players. Within the organized market, around 35% is met through imports and the balance 15% is met from the domestic capacities.

As part of its fiscal stimulus package the Government has increased its focus on infrastructure which includes power, oil & gas, roads, ports and airports. As per planning commission estimates, the Government has planned investments of USD 33 billion for the oil and gas sector, USD 40 billion for improving road and railway infrastructure, USD 18 billion for ports and USD 10 billion for airports, aggregating USD 100 billion. This infrastructure spending will lead to growth in the manufacturing sector.

As per the study of the Engineering Export Promotion Council and E & Y, Indiaʹs automotive exports should touch USD 35‐42 billion by 2016.The auto industry will move out of Detroit and Germany as it was not possible for them to remain competitive at their present wage rates and skill sets. India will have to gear itself to changes including electric and hybrid cars, climate change, green consciousness and carbon emissions, as well as high fuel prices and regulatory changes across the world.

Heavy expansion plans of leaders like Maruti, Hyundai, Hindustan Motors, General Motors, etc. will set growth path for battery industry in India.

Easy availability of loan & attractive EMI schemes, increasing per capita income, rapid industrial growth and heavy expenditure by Govt. on roads expansion will add on to the on‐going growth story of automobile sector in India, which will in turn have positive impact on auto ancillary industry.

Exports of auto components from the country grew at the rate of 35 percent during 2002‐07 and touched USD 3.6 billion in 2007‐08. It is estimated to reach around USD 20 billion‐USD 22 billion by 2015‐16.


Peers Comparison – Industry & Applications

Particulars Applications

Fag bearings Auto, Industrial ,Railways

SKF Bearings Multiple industry such as Aviation,railways,wind

energy, hospitals, Agri, Metals, Ships etc.

Bimetal Bearings OE’s including Defence & Railways.

After markets including STU’s & exports

ABC Bearings Auto

Timken India Multiple industries such as Aviation, railways, wind energy, Auto, cement, construction, paper

NRB Bearings Auto, tractors & farm equipments, Off highway

Source: Bloomberg, KJMC Research

Peer comparison - Valuation (Rs in mn)

Particulars CMP Market Cap. 1 yr fwd EPS 1 yr fwd P/E 1 yr fwd EV/EBITDA 1 yr fwd ROE% EBITDA% PAT%

SKF India Ltd 581 30636.1 42.1 13.8 8.1 22.8% 12.4% 9.0%

Fag Bearings 920 15290.4 77.47 11.9 5.3 19.5% 17.5% 11.0%

NRB bearings 51 4941.9 6.6 7.7 5.1 28.1% 22.7% 11.3%

Source: Bloomberg, KJMC Research

From the above table it is evident that NRB scores high on the valuation front as well as margins & ROE. NRB is able to manage competitive EBITDA & PAT margins against its peers which we think will be maintained by the company in future. Also, it has the highest RoE of 28.1%. On valuation basis, it appears to be quiet cheap and attractive with a 1 yr fwd EV/EBITDA of 5.1 and P/E of 7.7.

Outlook & Valuation

NRB is looking at increasing its presence in the after markets. Also with the Thailand plant getting operational, the contribution from exports is also likely to increase in future. For FY11, the revenues from the after markets is

likely to increase to Rs 200 mn from Rs 100 mn during FY10. We expect that the increasing share of after markets and exports will give a boost to the company earnings in future. Expansion plans will take the company’s revenues in a higher growth trajectory.

NRB appears to be more attractive as compared to its peers Fag bearings & SKF bearings in terms of margins, valuations and RoE.

At CMP of Rs 51, stock is currently trading at PE of 9.1x & 7.x its FY11E & FY12E earnings of Rs 5.6 & Rs 6.6 respectively. We initiate coverage with “Accumulate” recommendation and a target price of Rs 60 which is 9.0 x FY12E earnings of Rs 6.6. The target price translates into a potential upside of 18%.


Financial Analysis

During FY10 Net sales, EBITDA & PAT has grown by 20.8% ,68.4% and PAT at 59.1% at Rs 3,526.8 mn, Rs 549.4 mn and Rs 199.2 mn respectively. During FY10 EBITDA margin has improved by 440 bps at 15.6% from 11.2% in FY09 on account of declining raw material cost. PAT margins also improved by 520 bps at 6.2% during FY10 from 1.0% during FY09 due to improvement in other income & reduction in the interest cost.

NRB‘s performance on the net sales level have remained on a higher growth trajectory since third quarter of FY10 cloaking a double digit growth of above 30%. The demand in the domestic markets due to the stimulus package have witnessed a tremendous growth in the auto sector which in turn benefited players like NRB bearings.

Going ahead, we expect the auto sector to remain on higher growth trajectory and forsees healthy growth prospects for players like NRB. We expect the net sales, EBITDA & PAT to grow at a CAGR of 23.5%, 40.0% & 61.0% during FY10‐FY13E. EBITDA margins are likely to remain above 20% and PAT margins to remain above 10%.

Sales, EBITDA, PAT EBITDA & PAT margins

0.0

1000.0

2000.0

3000.04000.0

5000.0

6000.0

7000.0

FY09 FY10 FY11E FY12E FY13E

Sales EBITDA PAT

4.3%

11.2%

15.6%

22.2%22.7%22.7%

12.5%11.3%11.5%

5.6%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%


EBITDA PAT


ROE to remain above 25% A healthy growth in the net sales during FY10 of 21% and declining raw material to sales ratio led to RoE improving to 12.7% from 1.8% in FY09. With the overall improvement in the net sales and raw material cost remaining under control, we expect the company profitability to improve during FY11E‐FY13E. Hence, we expect the ROE of the company to remain above 25% during FY11E ‐ 13E.

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%


RoE % ROCE%



Stock price vis - a - vis peers and Auto index

Particulars 1 yr price movement% 3yr price movement% 5 yr price movement%

ABC Bearings 23.6% 61.3% 1.1% Bimetal Bearings 0.0% 40.7% -2.5% Fag Bearings 60.6% 76.8% 59.5%

NRB Bearings 33.7% 45.0% -6.5%

SKF India 49.7% 100.9% 87.0% Timken India 52.5% 79.5% 5.7% BSE Auto Index 21.8% 112.8% 73.2%


Quarterly Performance Analysis

Q3FY11 Result update - Standalone (in Rs mn) Particulars Q3FY11 Q3FY10 % y-o-y 9MFY11 9MFY10 % y-o-y Net Sales 1189.0 914.5 30.0% 3338.7 2448.10 36.4% Other Operating income 16.0 8.4 90.5% 43.0 24.3 77.0% Total Income 1205.0 922.9 30.6% 3381.7 2472.4 36.8% Raw materials 451.3 377.5 19.5% 1290.3 1021.50 26.3% Employee exps 180 163.9 9.8% 552.6 453.50 21.9% Other expenditure 287.7 219.3 31.2% 765.5 614.10 24.7% Total Expenditure 919.0 760.7 20.8% 2611.4 2072.4 26.0% EBITDA 286.0 162.2 76.3% 770.3 400.0 92.6% EBITDA margins (%) 23.7% 17.6% 610 bps 22.8% 16.2% 660 bps Other Income 4.0 4.1 -2.4% 30.4 32.60 -6.7% Interest 12.3 16.7 -26.3% 36.2 62.30 -41.9% PBDT 277.7 149.6 85.6% 764.5 370.3 106.5% PBDT margins (%) 23.0% 16.2% 680 bps 22.6% 15.0% 760 bps Depreciation 67.7 47.4 42.8% 169.1 142.30 18.8% PBT 210.0 102.2 105.5% 595.4 228.0 161.1% Taxes 67.1 36.2 85.4% 191.4 77.00 148.6% Extra ordinary items 0 0 0 14.1 0.0 0.0 PAT 142.9 66.0 116.5% 389.9 151.0 158.2% PAT margins (%) 11.9% 7.2% 470 bps 11.5% 6.1% 540 bps EPS (Adj) (Unit Curr.) 1.4 0.4 269.2% 4.0 3.1 29.1% Equity 193.8 96.9 100.0% 193.8 96.9 100.0% Face Value 2 2 2 2

Source: Company, KJMC Research Q3FY11 registered healthy growth of 30% in topline at Rs.1189.0 mn on y‐o‐y basis. EBITDA cloaked a skyrocketing growth of 76% at Rs 286 mn with an improvement of 610 bps in the EBITDA margins. Raw material to sales ratio and employee to sales ratio declined by 330 bps and 280 bps respectively for the quarter resulting in an improvement of EBITDA margins by 630 bps at 23.7%. Interest cost declined by 26.3% at Rs 12.3 mn. Profits after tax reported a healthy growth of 116.5% at Rs 142.9 mn with PAT margins improving by 470 bps at 11.9%


1 yr forward P/E Band

10

30

50

70

90

Apr-08

Jul-0

8

Oct-08

Jan-0

9

Apr-09

Jul-0

9

Oct.-09

Jan-1

0

Apr-10

Jul-1

0

Oct'10

Jan

'11

NRB Bearings 3x 6x 9x 12x 15x



Financial Summary - Consolidated

Profit & Loss Statement (Rs in mn) Particulars FY09 FY10 FY11E FY12E FY13E

Net Revenue 2920.2 3526.8 4757.0 5669.8 6637.3

Growth % -11.1% 20.8% 34.9% 19.2% 17.1%

Raw material cost 917.5 1263.1 1617.4 1927.7 2256.7

Manufacturing Cost 710.2 720.1 894.3 1037.6 1214.6

Employee cost 596.5 690.7 808.7 992.2 1161.5 Administrative & selling cost 369.7 303.6 380.6 425.2 497.8

Total Expenditures 2,593.9 2,977.4 3,701.0 4,382.8 5,130.6

EBITDA 326.30 549.38 1,056.06 1,287.05 1,506.66

EBITDA Margin (%) 11.2% 15.6% 22.2% 22.7% 22.7%

Other income 57.3 91.5 67.0 76.7 86.4

EBITDA including OI 383.6 640.9 1,123.1 1,363.7 1,593.0

Dep.& Amortiz 202.0 206.4 244.5 265.5 277.5

EBIT 181.7 434.6 878.5 1098.2 1315.5

EBIT Margin (%) 6.2% 12.3% 18.5% 19.4% 19.8%

Interest Expenses 97.2 89.0 64.7 137.5 73.4

Tax 54.6 127.7 268.6 317.0 409.9

Adj PAT 125.2 199.2 545.1 643.3 831.9

Balance Sheet (Rs in mn) Particulars FY09 FY10 FY11E FY12E FY13E

Sources of Funds

Share Capital 96.9 96.9 193.8 193.8 193.8

Reserve & Surplus 1562.8 1666.5 1887.9 2304.5 2909.6

Total Debt 1416.2 943.1 1643.1 1593.1 1343.1

Deferred Tax Liability 125.6 127.9 127.9 127.9 127.9

Minority interest -14.04 -13.87 -13.62 -13.27 -12.92

Total 3187.4 2820.6 3839.1 4206.1 4561.5

Application of Funds

Net Block 1760.2 1676.0 1931.4 1865.9 1788.4

Capital work in progress 15.2 13.6 13.6 13.6 13.6

Investments 0.7 0.7 0.7 0.7 0.7

Inventories 956.1 866.3 1169.8 1381.1 1616.8

Sundry Debtors 742.7 746.1 1107.8 1320.4 1545.7

Cash & cash Equivalents 45.2 55.0 85.8 65.1 83.8

Loans & Advances 156.8 200.2 247.6 295.1 345.5 Current Liabilities & provisions 489.4 737.2 717.5 735.7 832.7

Net Current Assets 1411.4 1130.4 1893.5 2326.0 2759.0

TOTAL 3187.5 2820.0 3839.2 4206.1 4561.6 Cash Flow Statement (Rs in mn)

Cash Flows FY09 FY10 FY11E FY12E FY13E NET Profit before tax & exceptional items 84.0 345.4 813.9 960.7 1242.1

Depreciation 202.0 206.4 244.5 265.5 277.5

Interest paid 97.2 89.0 64.7 137.5 73.4

Changes in Working capital (122.3) 248.5 (732.3) (453.2) (414.3)

Cash generated from operations 320.6 879.5 390.7 910.6 1178.7

Taxes paid (76.9) (120.4) (268.6) (317.0) (409.9)

Net Cash Flow from Operating Activities 243.7 759.1 122.2 593.6 768.9

Interest received 0.1 0.3 0.0 0.0 0.0

Capex (223.4) (116.0) (500.0) (200.0) (200.0)

Loans 198.3 (457.7) 700.0 (50.0) (250.0)

Dividends paid (116.2) (77.5) (193.8) (193.8) (193.8)

Tax on dividend paid (19.8) (13.2) (32.9) (32.9) (32.9)

Interest paid & others (99.3) (85.1) (64.7) (137.5) (73.4)

Net change in cash (16.5) 9.9 30.8 (20.7) 18.7

Opening cash 61.6 45.2 55.0 85.8 65.1

Closing cash 45.2 55.0 85.8 65.1 83.8

Ratios Particulars FY09 FY10 FY11E FY12E FY13E Profitability & Return Ratios

EBITDA Margin (%) 11.2% 15.6% 22.2% 22.7% 22.7% NP Margin (%) 4.3% 5.6% 11.5% 11.3% 12.5% EPS 0.3 2.2 5.6 6.6 8.6 CEPS 4.8 8.8 8.2 9.4 11.5 BVPS 34.3 36.4 21.5 25.8 32.0 ROE 1.8% 12.7% 28.4% 28.1% 29.7% ROACE 5.9% 14.5% 26.4% 27.3% 30.0% DPS 1.6 2.0 2.0 2.0 2.0 Operating efficiency and other ratios

Debtors T/o 3.6 4.7 4.3 4.3 4.3 Inventory T/o 1.8 2.3 2.1 2.1 2.1 Interest Coverage (x) 1.3 3.4 9.4 5.7 12.3 Asset/Turnover (x) 1.0 1.2 1.4 1.4 1.5 D/E (x) 0.8 0.5 0.8 0.6 0.4 Valuation Ratios P/E (x) 165.5 22.7 9.1 7.7 5.9 P/CEPS (x) 10.7 5.8 6.3 5.4 4.5 P/BV (x) 1.5 1.4 2.4 2.0 1.6 Mcap/Sales (x) 0.8 0.7 1.0 0.9 0.7 EV/Sales (x) 1.3 1.0 1.4 1.2 0.9 EV/EBITDA (x) 11.8 6.1 6.2 5.1 4.2



Mr. Girish Jain Executive Director [email protected] 2288 5201 (B)

Mr. Suresh Parmar A.V.P. ‐ Institutional Equities [email protected] 4094 5551 (D)

Mr. Vipul Sharma A.V.P. ‐ Institutional Sales [email protected] 4094 5556 (D)

Recommendation Parameters

Expected returns in absolute terms over a one‐year period Buy ‐ appreciate more than 20% over a 12‐ month period Accumulate ‐ appreciate 10% to 20% over a 12‐ month period Hold / Neutral ‐ appreciate up to 10% over a 12‐ month period Reduce ‐ depreciate up to 10% over a 12‐ month period Sell ‐ depreciate more than 10% over a 12‐ month period

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