Smooth ride ahead

SPECIAL REPORT

Growing demand in auto, railways and other industrial sectors augurs well for players in the bearings sector.

Bearings industry in India is expected to witness a smooth ride, on back of the growth in auto, other industrial sectors and railways. Even as the good growth in two-wheelers and light commercial vehicles (LCVs) have set the ball rolling, other sectors like engineering, steel and textiles are also expanding.

Outlook for the sector is bright given the increasing industrial activity. And analysts predict that dominant players like SKF, Fag Bearings, NRB Bearings (where Indian promoters recently bought out the foreign stake last week) should be big beneficiaries.

Says Rakesh Makhija, managing director, SKF India, "The industrial growth has provided opportunities for expansion and optimum capacity utilisation for bearing companies."

Auto sector which accounts for about 60 per cent of the total demand for bearings is expected to be one of the drivers of growth.

On a conservative estimate, analysts expect the LCVs to grow at over 10 per cent, even as heavy commercial vehicles (HCVs) have been facing some slowdown. While passenger vehicles are expected to grow at 10-11 per cent, two-wheelers is expected to grow at 16 per cent.

According to Society of Indian Automobile Manufacturers (SIAM), October 2005 witnessed a robust growth in domestic sales of automobile industry at 23 per cent y-o-y. The growth in auto sector in turn is augmented by the infrastructure development happening in a big way.

Industry observers also see good demand from other sectors like railways and engineering due to the general economic revival. Even as the unorganised sector brings stiff competition in the replacement market, the introduction of VAT is likely to make the environment more favourable for large players.

Robust financials
The major players in the sector have performed well in the September quarter, which was reflected in the stock performances. The Fag Bearings stock appreciated by 8.12 per cent on October 24 to Rs 336 on back of good quarterly results.

The company posted a 111 per cent y-o-y growth in net profit to Rs 15.2 crore, while net sales increased by 36 per cent to Rs 113.4 crore. The same day the stock touched the 52-week high of Rs 373. Analysts attribute the strong bottomline growth to the higher margins accruing from the replacement market, trading in imported bearings and its export oriented unit. 
 

BEARINGS SECTOR
(Rs crore)	SKF India*				Fag Bearings
	FY05	FY04	% change	SQFY06	FY05	FY04	% change	SQFY06
Net sales	581.31	466.87	24.51	184.67	327.19	270.50	20.96	113.36
Other income	23.69	22.35	6.00	12.16	3.25	3.70	-12.16	0.91
Operating profit	89.14	59.74	49.21	31.37	60.11	50.20	19.74	25.26
OPM %	15.33	12.80	-	16.99	18.37	18.56	-	22.28
Net profit	56.61	32.20	75.81	20.20	30.88	23.16	33.33	15.18
NPM %	9.74	6.90	-	10.94	9.44	8.56	-	13.39
EPS (Rs)	12.51	7.11	-	3.80	18.58	13.94	-	9.13
P/E (12 months trailing)

SKF India reported a 32 per cent y-o-y growth in net profit for September 06 quarter to Rs 20.2 crore, as compared to Rs 15.3 crore last time. Profit before tax increased 28.7 per cent to Rs 31.4 crore, while net sales increased by 25 per cent to Rs 184.7 crore. The company is in the process of upgrading its capacity in Bangalore and Pune plants and would invest at total Rs 100 crore by the end of 2005.

NRB Bearings posted a growth of 19.8 per cent y-o-y in net sales to Rs 62.2 crore, while its net profit shot up by 55 per cent to Rs 9.6 crore.

Analysts point out that Fag Bearings has an overall market share of about 11-15 per cent, while the bigger cousin, SKF controls 28 per cent of the market. Fag Bearings, SKF and NRB Bearings are into most categories like cylindrical roller bearings (CRB), spherical roller bearings (SRB), taper roller bearings (TRBs) and ball bearings. Whereas, others like Gabriel India operate in niche categories engine bearings.

SKF India caters to sectors like electrical, auto, industrial and service and has an impressive clientele which includes Tata Motors, Ashok Leyland, Bajaj Auto, Hero Honda, GE, Whirlpool, ABB, Bhel and Siemens. SKF has developed a range of solutions to meet the special challenges of India's 2-wheeler market. In July 2005, SKF diversified into innovative skating solutions, comprising bearings and superior lubricants.

As is the case in auto ancillaries overall segment, export is a major growth driver for bearing as well. While SKF's Swedish parent is expected to drive its export revenues, in the case of FAG bearings, outsourcing by its German parent would continue to drive the exports.

Industry outlook
Bearings are broadly classified into ball bearings and roller bearings. About 60 per cent of the bearings demand in the country is met by the organised segment. Another 10 per cent is contributed by the unorganised segment and about one-third of the demand is met through imports.

The unorganised sector, which chiefly manufactures low-quality small bearings, caters primarily to the replacement market. Organised sector supplies to both, OEMs and the replacement market.

Industrial segments like atomic and steel plants, shipping, power and heavy engineering rely largely on imported bearings.

Even as auto, railways and other sectors continue to create demand for bearings, competition is likely to intensify in future and would require manufacturers to bring in the right technology and product mix. Reduction in import duty could lead to cheap imports and further competition, according to Makhija.

To counter the threat from unorganised segment in the replacement market, the biggies have been trying to establish their brands apart from focusing on value-added products like hub bearings.

SKF, for instance, is following the five knowledge platforms, viz. bearings & units, seals, lubrication systems, mechatronics and services. Makhija sees good growth potential in the high margin replacement market along with the growing auto sector.

Going forward, analysts see some consolidation in the bearings industry and that would give the bigger players a better grip on the market. Prices of steel, the raw material, would also have a bearing on the fortunes of the bearings industry.

At an annualised EPS of Rs 36.52, Fag Bearings trades at a P/E of 10.41x, while SKF India at an EPS of Rs 15.2, trades at 15.07x. Other players in the industry are NRB Bearings (10.5x), ABC Bearings (8.91x), Timken India (24.8x) and Gabriel India (21.9x).