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FAG Bearings 3QCY2012 performance highlights and results update

Contributed by Angel Broking

FAG Bearings (FAG) registered weak results for 3QCY2012 as operating margins plunged 524bp yoy (232bp qoq) mainly on account of raw-material cost pressures. We revise downwards our earnings estimates for CY2012E/13E by 7.1%/4.4% primarily to factor in the significant margin pressures witnessed during the quarter. We maintain our long term positive view on FAG; however, considering the near term headwinds (slowdown in automobile sales and industrial activity) and limited upside from current levels we maintain our Neutral rating on the stock.

Weak performance for 3QCY2012: For 3QCY2012, FAG's top-line reported a moderate growth of 6.8% yoy (down 6.3% qoq) to Rs.356cr, which was marginally below our expectations of Rs.368cr. The top-line performance during the quarter was impacted by a slowdown in the automotive and industrial sectors which are the primary drivers of the companyRs.s performance. However, the operating profit fell steeply by 21.6% yoy (19.2% qoq) as margins witnessed a sharp decline led by raw-material cost pressures and reduced operating leverage benefits. The raw-material cost as a percentage of sales jumped 430bp yoy due to a sharp depreciation of INR vs EUR. However, employee and other expenditure as a percentage of sales increased 30bp (50bp qoq) and 80bp yoy (280bp qoq) respectively during the quarter. Led by a weak operating performance, the net profit declined 18.7% yoy (20.1% qoq) to Rs.37cr.

Outlook and valuation: We maintain our positive stance on FAG, considering its strong parentage, debt-free status and cash balance worth ~Rs.11 1/share on the books. At Rs.1,730, the stock is trading at 13.6x CY2013E earnings, which is slightly on the higher side compared to its historical average. Hence, we maintain our Neutral rating on the stock.