Recommendations » India

FAG Bearings 3QFY2012 performance highlights and results update

Contributed by Angel Broking

FAG Bearings (FAG) reported a strong set of results for 4QCY2011, despite a marginal slowdown in the automotive and industrial sectors, the company’s main growth drivers. Results were ahead of our estimates mainly due to strong top-line growth; the company’s operating margin was, however, negatively impacted due to higher proportion of traded goods. We rollover to CY2013E and recommend Accumulate on the stock.

Margin pressures restrict profitability: FAG posted strong 31.4% yoy (4.8% qoq) growth in its top line to Rs.350cr, despite sluggish automotive demand and slowdown in industrial activity. EBITDA margin declined by 150bp yoy (170bp qoq) to 18.1% due to the surge in raw-material cost, primarily on the tradingpart of the business. In our view, this could be because of INR depreciation against EUR, which resulted in a 480bp yoy increase in traded goods as a percentage of sales. However, the 380bp yoy decline in other expenditure as a percentage of sales prevented the margin from declining further. Nonetheless, led by robust top-line growth, net profit grew strongly by 27.3% yoy to Rs.43cr. However, sequentially, it declined by 5.4% mainly due to EBITDA margin contraction.

Outlook and valuation: We maintain our positive stance on FAG, considering its strong parentage, debt-free status and cash balance worth Rs.140/share on books. At Rs.1,323, the stock is trading at 10x CY2013E earnings. We rollover to CY2013E and recommend Accumulate on the stock with a target price of Rs.1,457, valuing the stock at 11x CY2013E earnings