SKF India: BUY

SKF India is a good play on the revival in economic growth. Supplying products such as bearings, seals and lubricants for both automotive and industrial requirements, the company will be a direct beneficiary of the turnaround in auto sales and the uptick in industrial production. Its market leadership position, strong technological backing from its parent, Sweden-based SKF AB, and debt-free status also make the stock attractive.

At ₹1,394, the stock trades at about 34 times its trailing 12-month earnings.

This is at a discount to its peer FAG Bearings, which trades at about 40 times. Investors willing to hold for at least one year can buy the stock.

Bearings are used in almost all equipment to regulate speed, reduce friction, carry loads with ease and make their functioning more efficient.

SKF has about 25-30 per cent market share in the bearings industry in India and depends almost equally on the automotive and industrial segments for its revenues. After the slowdown of the last one-two years, factors such as the cooling off of inflation, rate cuts by the RBI and the gradual pick-up in industrial and automobile production imply that India should be back on the high growth path soon.

With several automobile companies such as Tata Motors, Maruti, Mahindra and Mahindra, Hero MotoCorp and Bajaj Auto among its clients, SKF is positioned well to benefit from the expected double-digit growth in auto sales over the next two years. Already, in the April-December 2014 period, the overall domestic volume growth across all vehicle segments put together improved to 9.5 per cent from the 3.5 per cent growth in the year ended March 2014.

Besides, bearings are used across industries such as material handling, power, railways, machine tools and mining. Apart from a comeback in manufacturing and construction demand, policy measures to remove stumbling blocks and speed up execution in sectors such as power and mining should aid SKF.

In the industrial division, SKF counts companies such as SAIL, NTPC, Tata Power, BHEL, L&T, GE, Reliance Industries, Cairn and ITC among its clients.

About two-third of the industrial segment sales and one-third of the automobile segment sales come from the replacement markets currently. Hence, the sizeable replacement demand for bearings and a mild recovery in new vehicle sales in the last few months have kept SKF’s sales ticking in recent times.

For the nine months ended September 2014, net sales grew 7 per cent year-on-year to ₹1,767 crore and net profit 37 per cent to ₹162 crore.

Operating margin for these nine months stood at around 13 per cent compared with 11.4 per cent in the year-ago period. It has scope for expansion from greater domestic sourcing of industrial bearings.

SKF India makes automotive bearings domestically, but a majority of the industrial bearings is imported from the parent and sold as traded goods here. SKF Technologies, a subsidiary of the parent SKF, has recently set up a plant in Ahmedabad to make bearings for a few industries. Currently, only 10 per cent of the industrial bearing requirements of SKF India are obtained from here. More sourcing from this plant is expected.

The company is also expanding its distributor network for industrial bearings to cater to the replacement demand. Greater sale of new value-additions, such as energy monitoring service for pumps, StopGo for two-wheelers and rotor positioning bearings — all of which focus on reducing emissions — will also help margin expansion. These products now account for around 12 per cent of revenue.