Investor's Eye: Update - Automobiles

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Investor's Eye [February 25, 2014]  Sharekhan www.sharekhan.com

Summary of Contents   SECTOR UPDATE Automobiles Improving growth outlook of bearing companies; accumulate SKF India and FAG Bearings on decline Key points In spite of a continued slowdown in the automobile (auto) sector (read original equipment manufacturers [OEMs]), the leading bearing makers have reported a strong set of financial performance in the recent couple of quarters on the back of a robust replacement demand (accounting for 35% of revenues) and a surge in exports led by the rupee's depreciation against the dollar. Our channel checks show that the demand in the replacement market is driven by the growing preference for branded products and the slowdown in imports (especially from China) led by the rupee's weakness.  With the expected revival in auto volumes (on a low base of CY2013) also adding to the growth in the bearing sector going ahead, we expect the bearing companies to report a double-digit revenue growth over CY2013-15. Also, the margins are expected to remain in a higher trajectory, given the benign commodity prices, benefits of operating leverage, higher proportion of revenues from the replacement market and currency gains in exports (5-15% of revenues).  Notwithstanding the recent run-up in the bearings stocks, we see scope for a 10-15% appreciation in the share price of the leading bearing companies like SKF India and FAG Bearings over the next three to six months. One should look at accumulating these stocks on declines.  Though SKF India and FAG Bearings trade at similar valuations on our CY2015 earnings estimates, but we prefer FAG India to SKF India, given the former's capacity expansion (which will enable it to outpace the industry growth); strong parental focus (the parent aims to double the contribution from the Indian arm); superior margin profile; and increased proportion of exports (14% as compared with 6% in case of SKF India). Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Regards, The Sharekhan Research Team

 

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