FAG Bearings

‘Bearing’ good returns

FAG Bearing India is an attractive long-term investment in view of its strong financials and high levels of profitability consistently clocked by the company. Given the good long-term growth opportunities, impressive clientele, strong parent support and sustained high OPMs of over 20%, we expect FAG to record a CAGR growth of 12-14% in volumes over FY2007-09E, which will drive 14-16% growth in Revenues and Profits in the mentioned period. Further, high Return Ratios are also likely to keep FAG's Earnings multiple above 14x.

FAG Bearings India is a leading player in the Indian Bearing industry. FAG, Germany, has a 51% stake in the company. FAG India is a leading OEM supplier to the Automobile and Engineering industries, besides the Railways.

Strong support from Parent company: FAG India is a FAG Kugelfischer George Schaefer AG Group company. The parent manufactures bearings for automotive and industrial applications. FAG’s bearings have gained ready acceptance and recognition with its customers across the globe. FAG India is a preferred supplier of bearing systems to the world's leading manufacturers of cars and trucks like GM, Ford, Volkswagen, etc. Further, with these players looking at enhancing their presence in India and other countries, FAG enjoys an edge over peers to supply to these OEMs in India.

Industry outlook encouraging: Bearings are one of the major industrial products and in a matured economy the 'Index of Industrial Production' (IIP) acts as a good proxy for the Bearings industry. But, in a developing economy like India, with greater emphasis on mechanisation of the manufacturing process, demand for bearings tends to outperform industrial growth. Growth in the economy especially in the Capital Goods sector presents a strong outlook for the Bearings industry. Demand for bearings also has a strong co-relation to the growth in the Manufacturing sector, which is expected to continue on growth path andaugurs well for the Bearing industry.

The Automobile industry has also grown in double-digits of around 15% CAGR in the last five year. Bearing also has a direct co-relation with Auto industry growth, which is expected to grow reasonably at 10-12% CAGR over the next 4-5 years. This would again perk up Sales growth of the Bearings industry and players therein. The demand from Railways remained steady during the year. Therefore, we estimate FAG India's Net Sales and Net Profit to grow at a CAGR of around 14% over CY2007E-09E.

Capex to meet surging demand: FAG India has announced a •60mn (Rs350cr) expansion plan for its needle bearings to meet the substantial increase in demand in the Automobile sector. The company would reap the benefits of this expansion from CY2008. The company has been operating at over 100% capacity utilisation since the last five years. It has also steadily improved its fixed asset turnover ratio from 0.99 in CY2002 to 1.66 in CY2006. Going ahead, it expects to further improve this ratio by investing in additional capacity. Capex will be met through internal accruals. We believe the company will continue to operate at over 90% capacity utilisation over the next 3-4 years, as demand for bearings is expected to remain healthy. The company's focus on expanding capacity would result in an improvement in the cost of production and would also enable it to improve its marketshare.

Outlook and Valuation

At Rs692, the stock is quoting at 11x CY2009E. FAG's prospects are derived from demand arising in the Auto and Manufacturing industries. In the recent past, the Auto Industry valuation have been subdued, as Earnings have been under pressure due to the sluggish demand. However, going ahead, the industry cycle is expected to clock positive growth. Hence, we have assigned EV/EBITDA of 7.5x CY2009E and P/E multiple of 12.8x CY2009E Earnings for FAG India and have derived the Target Price of Rs801. In view of the current sharp run in the stock price, we advise investors to Accumulate and enter the stock at lower levels with a long-term perspective.

----- With due apologies and full credits to Angel Broking