Nitin Agrawal Moneycontrol Research
Highlights: - Subdued topline growth in Q3 FY19 due to weakness in the automotive segment - Near-term automotive outlook is sluggish, positive in the long term - Industrial segment is showing an uptick - SNL Bearings, Menon Bearings and NRB Bearings are our preferred picks --------------------------------------------------
We analysed the Q3 FY19 performance of companies from the bearings space and identify the ones which exude confidence.
SNL Bearings (SNL) We had initiated the coverage on SNL, a needle bearings manufacturer, which caters to automotive, original equipment manufacturers (OEM) and aftermarket segments.
The company posted a weak operating performance. Though it posted absolutely flat year-on-year (YoY) growth in topline, EBITDA (earnings before interest depreciation and tax) declined 19.8 percent. EBITDA margin contacted 661 bps due to negative operating leverage, leading to higher operating and employee expenses. Its EBITDA margin, however, continues to be the highest in the industry.
Though the automobile segment has been reeling under multiple challenges, we continue to exude confidence in the company on the back of strong positioning in the segment and a very strong set of financials. The company is also trading at a significant discount when compared to its peers.
Menon Bearings (MBL) MBL is a manufacturer of bi-metal engine bearings, bushes and thrust washers for light and heavy auto engines, two-wheeler engines as well as compressors for refrigerators, air conditioners etc.
The company posted a decent set of Q3 FY19 earnings. It posted a 9.9 percent revenue growth on the back of marginal volume increase coming in from major original equipment manufacturers (OEMs) and eight percent export growth. EBITDA margin, however, was marred by rise in operating expenses and witnessed a 221 bps YoY contraction. The impact of which got partially offset by reduction in raw material cost, down 191 bps. EBITDA margin came in at 24.2 percent, the second-highest among all players.
The company has planned to increase its bearings capacity by 30-35 percent over the next one year to meet rising demand accruing from the commercial vehicle segment. This, coupled with strong clientele, new contracts, robust financials and reasonable valuations beckon investor attention.
NRB Bearings (NRB) NRB is the largest needle roller bearing manufacturer in India, with segmental market share of around 70 percent. It posted a 17 percent YoY growth in net operating income, driven by strong growth in 2W and export demand. EBITDA saw lower growth (5.2 percent) and margin contracted by a significant 194 bps on the back of higher other expenses due to one-time expenses. Margin, however, continues to remain above 17 percent.
The company is present is in all automobile segments, which are expected to be sluggish in the near term due to weakening of demand from OEMs. However, the target of increasing market share in after-market and focus on exports would continue to aid topline. The counter is trading at reasonable valuations. We advise investors to accumulate this in a staggered manner.
SKF India (SKF) Despite significant challenges on both the automotive side and slowing industrial output, the company reported net sales growth of 9.6 percent YoY on the back of 20 percent growth coming in from the industrial segment.
EBITDA, however, remained flat and EBITDA margin contracted 171 bps at 15.9 percent. Margin was lower on the back of slower growth in the auto segment and adverse product mix.
Going forward, the management is confident of outperforming industry on the back of new product launches, which is expected to add Rs 40-50 crore and higher value products. Apart from that, aftermarket continues to be strong for the company and energy, renewables, railways and defence sectors may witness an uptick in demand. In terms of valuation, the stock currently trades at 25.3 times FY20 estimated earnings, which is above our comfort level.
Schaeffler India Schaeffler India posted a 16 percent growth in net sales on the back of 25 percent YoY growth coming in from the industrial segment. This growth was driven by infrastructure, off-road, cement, railways and the replacement market. Auto segment, on the other hand, witnessed a slowdown in growth (15 percent) due to weak demand being witnessed by OEMs.
The company posted a 358 bps contraction in EBITDA margin due to increase in raw material cost, lower contribution from higher margin auto segment and change in product mix.
Though the auto segment outlook is muted in the short term, industrial segment is witnessing an uptick. The company's strong product portfolio, addition of new products and capacity expansion plans deserves attention. The stock is currently trading at 26.8 times FY20 estimated earnings, which is the highest among all players.
Timken India Timken India is a market leader in tapered roller bearings and is the only indigenous manufacturer of freight application bearings for railways.
The company reported merged entity numbers (Timken + erstwhile ABC Bearings). It posted a very 38.1 percent and 168.1 percent growth in net sales and EBITDA, respectively. EBITDA margin expanded 700 bps due to significant reduction in operating expense, owing to operating leverage.
The company is currently trading at a very expensive valuation, the second highest among all players, which leaves us cold.
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Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here
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