Hold SKF India; target of Rs 1615: ICICI Direct

ICICI Direct's research report on SKF India

SKF India reported relatively flattish numbers YoY whereas sequentially revenues jumped 133.4%, given a lower base in Q1 and swift recovery witnessed by the auto sector. Revenue for the quarter was at Rs 703.2 crore, down 5.9% YoY (vs. I-direct estimate of Rs 744.1 crore). Gross margins were at 37.2%, improving ~120 bps YoY while contracting ~180 bps QoQ as steel prices have recovered lately. SKF posted improved EBIDTA margin of 13.1% vs. 12.7% YoY, led by 3% & 2.4% decline in employee cost and other expenses YoY, respectively. Absolute EBIDTA declined 3.4%, coming in at Rs 91.8 crore (vs. I-direct estimate of Rs 96.4 crore) given lower sales. SKF ended the quarter with a PAT of Rs 65 crore (vs. I-direct estimate of Rs 61.5 crore), down 23.2% YoY. Decline in PAT was largely attributable to lower other income (Rs 7.8 crore in Q2FY21 vs. Rs 23.2 crore in Q2FY20) as the company paid a special dividend of Rs 130/share in July entailing a cash outflow of Rs 641 crore, depleting the overall cash reserves of the company.

Outlook

Taking cognisance of the recent auto numbers and management commentary, we expect a revenue decline of 20.5%, 8% for manufacturing, trading segments, respectively, for FY21E. In contrast, we expect these segments to grow 28%, 25%, respectively, in FY22E. Overall, we expect FY20–22E revenues to grow at a CAGR of 5.3% and FY21E revenues to decline 12%. Currently, the stock is trading at 25x FY22E earnings and, thus, leaves very little upside. We maintain our HOLD rating on the stock with a revised target price of Rs 1615/share at 25x FY22E earnings.