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Last Updated : Mar 01, 2018 02:16 PM IST | Source:

Q3FY18 review: Bearings sector hits a sweet spot on industry tailwinds, strong financials

Our analysis suggests a strong road ahead for SNL Bearings, Menon Bearings and NRB Bearings. We are relatively less bullish on SKF, Schaeffler and Timken on account of their premium valuation.

Bearing sector is in a sweet spot on the back of secular growth in the automobile sector, uptick in industrial segment, and improvement in technology, which would lead of increase in content per vehicle. With few players in the fray, the companies have reasonable pricing power and strong financials.

Our analysis of the sector suggests a strong road ahead for SNL Bearings, Menon Bearings and NRB Bearings. We are relatively less bullish on SKF, Schaeffler and Timken on account of their premium valuation.

SNL Bearings Ltd.

We had initiated coverage on SNL bearings, a needle bearings manufacturer that caters to automotive, Original Equipment Manufacturers (OEM) and aftermarket segment.


The company posted a very strong set of numbers for Q3FY18 with net operating income clocking YoY (year-on-year) growth of 16.3 percent and EBITDA growing at 17 percent. EBITDA margin largely remained flat at 33.3 percent and it is highest among all players in the industry. However, its after-tax-profit registered a growth of 21.1 percent as company retired its full debt leading to zero interest cost.

We continue to have confidence in the company on the back of strong industry tailwinds, a very strong set of financials. The company is trading at a discounted valuations when compared to its peers.

Menon Bearings Ltd. (MBL)

MBL is a manufacturer of bi-metal Engine bearings, Bushes & Thrust Washers for light & heavy automobile engines, two wheeler engines as well as compressors for refrigerators, air conditioners etc.

Riding well on the growth in commercial vehicle segment, the company posted a very strong set of numbers for Q3FY18. It witnessed a significant YoY growth of 31.8 percent in net operating income. Its EBITDA margin stood at 25.1 percent, second-highest among all players.  The company registered a growth of 38.6 percent in its after-tax-profit.

The company has also planned to increase its bearings capacity by 30-35 percent over next one year to meet the rising demand coming from commercial vehicle segment. This coupled with strong financials and reasonable valuations beckon investors’ attention.

NRB Bearings Ltd. (NRB)

NRB is the largest needle roller bearing manufacturer in India with a segmental market share of around 70 percent.

The company posted a strong 25.8 percent growth in net operating income driven by strong growth in demand for passenger and commercial vehicles. Its EBITDA witnessed a growth of 102.4 percent and margin expanded by a significant 738.8bps on the back of falling raw material prices and employee cost as a percent of net operating income. Interest cost has fallen by 23.4 percent, leading the company to report 177.81 percent surge after-tax-profit.

The presence of the company in the growth segments of automobile coupled with the target of increasing the market share in aftermarket give us the required comfort in the company. The reasonable valuation is an added sweetener.

Bearing 3QFY18 result review

SKF India Ltd. (SKF)

While the company reported a YoY growth of 5.4 percent in net sales, its EBITDA witnessed a significant growth of 38 percent. This was primarily on the back of favorable mix with auto segment growing at 17 percent. EBITDA margin witnessed an expansion of 415 bps to 17.6%, a lifetime high primarily because of the higher contribution from manufactured goods. The management indicated that these margins cannot be sustained and would normalize, going forward.

Industrial sales were subdued during the quarter on the back of poor sales coming from wind segment. In auto segment, while the growth in PV (passenger vehicle) segment has peaked, other segments are expected to continue to do well. Moreover, the company expects a strong growth from railways.

In terms of valuation, the stock trades at 29.8 times FY19 projected earnings, which is above our comfort level.

Schaeffler India Ltd.

The company posted results similar to SKF India with topline growing 9 percent on the back of 22 percent growth in auto segment and 30 percent in exports. The partially got marred by poor sales coming from the wind segment.

Company’s EBITDA witnessed a growth of 37 percent and margin expanded by 408.1bps on the back of favorable product mix and operational efficiency improvement. The company has planned to increase CapEx to EUR40-45 million vs. EUR15-20 million in the past as the utilization has started to peak out.

The company is currently trading at 31.5 times FY19 projected earning – second highest among all players.

Timken India Ltd.

Timken India is a market leader in tapered roller bearings and is the only indigenous manufacturer of freight application bearings for railways.

While the company posted a strong growth of 20.6 percent in its net sales, the EBITDA declined by 12.9 percent. EBITDA margin also contracted by 285.6bps. This was due to rise in raw material prices.

The company is currently trading at 31.7 times FY19 projected earning –highest among all players, which leaves us cold.

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First Published on Mar 1, 2018 02:08 pm
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