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FAG Bearings 4QCY2012 performance highlights and results update

Contributed by Angel Broking

FAG Bearings (FAG) posted extremely poor results for 4QCY2012 owing to a sharp deterioration in the EBITDA margin by 591bp yoy (258bp qoq), mainly due to raw-material cost pressures. We revise downwards our earnings estimates for CY2013/14 by 14.9%/13.2%, primarily to factor in the significant margin pressures witnessed during the quarter. Nevertheless, we expect the company’s top-line performance to improve going ahead, led by easing of interest rates in CY2013 which is expected to revive demand in the automotive and industrial sectors. We maintain our Accumulate rating on the stock.

Weak performance for 4QCY2012: For 4QCY2012, FAG’s top-line stood flat (down 2.5% qoq) at Rs.347cr, which was lower than our expectation of Rs.369cr. The top-line performance was impacted by a slowdown in the automotive and industrial sectors, which are the primary drivers of the company’s revenues. The operating profit fell significantly by 33.4% yoy (19.9% qoq) to Rs.41cr, as margins registered a sharp fall led by raw-material cost pressures and lower operating leverage. While, the raw-material cost as a percentage of sales surged 389bp yoy; employee expenditure as a percentage of sales jumped 90bp yoy during the quarter. Led by a weak operating performance, the net profit declined 30.9% yoy (19.6% qoq) to Rs.30cr, lower than our expectations of Rs.39cr.

Outlook and valuation: We maintain our positive stance on FAG, considering its strong parentage, debt-free status and cash balance worth Rs.117/share on the books. At Rs.1,440, the stock is trading at 11x CY2014E earnings. We maintain our Accumulate rating on the stock with a target price of Rs.1,569, valuing the stock at 12x CY2014 earnings.