Bearings Sector 140221 Edelweiss Initiating Coverage FAG Bearing SKF India NRB Bearings Timken India Sector Report PDF

BANYAN
s e r ie s
Growth Without
Maintenance
Pro
d uc
Recon tio
ditio nP
nin ro
Failure g, ce
Ana Pr
lys od
ss
Condit is, u
Kn
ion C
Mo al
ct
ow
Training n
&
it
-Ho
, In
cu
sta or
Se
lat
r
lla
w,
vic
ion
in
t
g,
e
io
&O
Me
Pac
nC
c ha
ptim
kages
on s
tron
ulting
ization,
,
ics,
Appl
Mou
icat
nti
ng
i on
Se l
vic
Kn
es
ow
ed
ge
Shradha Sheth Manoj Bahety, CFA

+91 22 6620 3308 +91 22 6623 3362 Edelweiss Securities Limited
shradha.sheth@edelweissfin.com manoj.bahety@edelweissfin.com
We are delighted to initiate Bearing sector under our mid-cap series, ‘Banyan’. Banyan signifies Growth Without
Maintenance and under the series we endeavour to present stocks not widely covered owing to low management access /
liquidity, but which possess robust long-term fundamentals and structural drivers. Considering the low management access
and long-term structural drivers, we will not release regular maintenance updates on the said stocks.
Our selection framework is differentiated in this series and not clouded by valuations alone. Some of the important
attributes of stocks under the series are:
1. Good corporate governance history
2. Healthy balance sheet with robust cash flows
3. May have low liquidity
4. Low or no management access
5. Not widely covered
6. Low institutional holding
Our latest initiation under the ‘Banyan Series’ are SKF and FAG. The companies, by virtue of their dominance ~45% market
share in ball bearings segment for SKF and ~45% market share in the roller bearings segment for FAG, make them domestic
market leaders. A strong product portfolio with technology expertise make players like SKF and FAG preferred suppliers to
original equipment manufacturers (OEMs) right from the product development stage. The sector is highly diversified with
auto sector contributing 48% and industrial segment at 52% of overall sales. We perceive huge growth opportunity in
automotive segment as India becomes one of the major manufacturing hubs for global OEMs. Also, the healthy industrial
segment will reap benefits as imports get substituted with localised sales. Hence, with expected uptick in auto and
eventually industrial sectors, we expect SKF and FAG to register 26% and 31% CAGR in earnings over CY13-15E,
respectively. Companies have strong financial metrics: (1) high return ratios (average core RoCE of ~40%, core RoE of
~28%); and are (2) cash rich with net cash per share—SKF and FAG at INR105/share (17% of market cap) as on CY12 and
INR195/share (12% of market cap) as on CY13, respectively. We initiate coverage with ‘BUY’ recommendations on SKF and
FAG with target prices of INR795 and INR2,022, implying upsides of 26% and 30%, respectively.
As always, we await your valuable feedback.
Regards
Nischal Maheshwari
Co-Head Institutional Equities & Head Research
Bearings
Executive Summary
Executive summary
We initiate coverage on India’s bearing industry with a
positive view. We expect an uptick in cyclical drivers—auto
and eventually industrial sector—over the medium term,
while the structural drivers are expected to look up over the
longer term with increasing localisation of industrial bearings,
(Click here for which are currently imported (32-43% of sales). High level of
video clip)
technology-based differentiation achieved by players in their
respective focus areas ensures strong positioning and low competitive
intensity. A strong product portfolio with technology expertise make players
like SKF and FAG preferred suppliers to original equipment manufacturers
(OEMs) right from the product development stage. Highly diversified profile
with auto sector contributing 48% and industrial segment at 52% of overall
sales. We perceive huge growth opportunity in automotive segment as India
becomes one of the major manufacturing hubs for global OEMs. Also, the
healthy industrial segment will reap benefits as imports get substituted with
localised sales. Hence, with expected uptick in auto and eventually industrial
sectors, we expect SKF and FAG to register 26% and 31% CAGR in earnings
over CY13-15E, respectively. We initiate coverage with ‘BUY’
recommendations on SKF and FAG with target prices of INR795 and INR2,022,
implying upsides of 26% and 30%, respectively.
Secular drivers: The Indian bearings industry is driven largely by the industrial sector (52%
contribution) and automobiles (48% contribution). SKF and FAG majorly import industrial
bearings from their parents. This is in the form of traded bearings, with SKF earning 43%
revenue and FAG 32% from this segment. Massive capital outlay is expected to drive
increasing localization, in turn propelling huge structural opportunity for the industry. This
will be predominantly led by declining lead times and immense cost benefits. We expect the
companies to pass on benefits of growing localisation, which could lead to market share
gains. Additionally, global auto majors making India a manufacturing hub offers
unprecedented growth opportunity.
Cyclical drivers: The automobile sector is a major driver for the bearings industry with
revenue contribution of ~48%. The uptrend in two-wheelers (2W) is eventually expected to
extend to passenger vehicles (PVs) and commercial vehicles (CVs) in the last leg. With
expected recovery in automobiles, SKF (derives ~58% OEM revenue from 2W segment) will
be a strong beneficiary. FAG will be a strong beneficiary of the uptick in PV and CV
segments, deriving ~44% and ~30% of its automotive OEM revenues from these segments,
respectively. The bearing companies have a diversified revenue mix with almost half (~52%)
coming from the industrial sector. With expected revival in IIP, the industrial bearings
segment is expected to post robust growth also led by improvement in key segments such
as railways, power and mining sectors.
Competitive advantage: SKF, FAG, Timken and NRB have carved a niche with dominant
positioning anchored by their strong product portfolios along with technology expertise. As
a result, these players have been able to partner with OEMs right from the product
1 Edelweiss Securities Limited

Bearings
development stage. In India, SKF commands a formidable ~45% market share in ball
bearings segment and FAG commands a strong ~45% market share in the roller bearings
segment. Strong global parentage provides huge expertise and global processes to these
companies which new companies find difficult to replicate. Thus, their dominant position in
niche areas provides them high growth opportunity in their respective segments.
Comparison: SKF is the market leader with an overall ~28% revenue share driven by its
global parentage. FAG stands at No.2 with an overall revenue share of 17%. SKF has a
diversified business model (~45% of revenue from automotive segment, 49% from industrial
segment, 6% from exports). Also, overall SKF derives 47% revenue from the aftermarket,
which makes its revenue profile less cyclical. FAG derives 35% revenue from the automotive
segment, 51% from industrial segment and 14% from exports. Overall, it derives 30%
revenue from aftermarket.
Strong financial metrics: The industry has strong financial metrics: (1) high return ratios
(average core RoCE of ~40%, core RoE of ~28%); and (2) strong cash rich companies with net
cash per share—SKF and FAG at INR105/share (17% of market cap) as on CY12 and
INR195/share (12% of market cap) as on CY13, respectively. With robust cash flow
generation, we expect cash per share to be augmented by 1.88x over CY12-15E to
INR197/share in CY15E (31% of current market cap) for SKF and by 1.7x over CY13-15E to
INR339/share in CY15E (22% of current market cap) for FAG.
Strong investment case with long-term horizon: SKF and FAG will be strong beneficiaries of
the uptick in the 2W and 4W segments. This, in conjunction with a strong industrial
portfolio, will derive huge benefits of growing localisation. SKF and FAG are trading at 12.0x
and 12.3x CY15E EPS respectively, which is at a discount of up to ~15-19% to SKF’s mean
historical valuations of 15x. We initiate coverage with ‘BUY’ recommendations on SKF and
FAG valuing at 15x and 16x CY15E earnings, to arrive at the target prices of INR795 and
INR2,022, implying upside of 26% and 30%, respectively.

Bearings
Contents
Executive summary .................................................................................................................. 1
Contents................................................................................................................................... 3
At a glance................................................................................................................................ 4
India bearing industry: Overview ............................................................................................. 5
Evolution of domestic bearings industry.................................................................................. 8
Industry revenues and market share of players ...................................................................... 9
Industry drivers ...................................................................................................................... 14
Steady long-term financials.................................................................................................... 18
Global bearings industry ........................................................................................................ 26
Companies (Initiating Coverage)

FAG Bearings .......................................................................................................................... 29
SKF India................................................................................................................................. 53
Companies (Unrated)
NRB Bearings.......................................................................................................................... 77
Timken India .......................................................................................................................... 81

At a glance
Financials
Rating Price Mcap Year Revenue EBITDA EBITDA Core PAT Core EPS (Growth %)
Absolute (INR) (INR bn) (INR mn) (INR mn) Margin (%) (INR mn) (INR) Revenue EBITDA PAT EPS P/E
Bearings
FAG bearings BUY 1,559 26 CY11 13,086 2,540 19% 1,760 106 25.8 41.0 42.8 42.8 14.7
CY12 14,467 2,204 15% 1,592 96 10.6 (13.2) (9.5) (9.5) 16.3
CY13 14,300 1,836 13% 1,218 73 (1.1) (16.7) (23.5) (23.5) 21.3
CY14E 16,764 2,319 14% 1,591 96 17.2 26.3 30.6 30.6 16.3
CY15E 20,343 3,024 15% 2,100 126 21.3 30.4 31.9 31.9 12.3
SKF INDIA BUY 634 33 CY11 24,349 2,979 12% 2,078 39 17.7 18.3 16.6 16.6 16.1
4
CY12 22,276 2,584 12% 1,901 36 (8.5) (13.3) (8.5) (8.5) 17.6
CY13E 22,268 2,499 11% 1,752 33 (0.0) (3.3) (7.8) (7.8) 19.1
CY14E 25,807 2,958 11% 2,151 41 15.9 18.4 22.7 22.7 15.6
CY15E 31,000 3,788 12% 2,795 53 20.1 28.1 29.9 29.9 12.0
Source: Edelweiss research
Edelweiss Securities Limited

Bearings
Indian bearing industry: Overview
The Indian bearings market accounts for less than 4% of the world’s bearing market. Major
organised players include international manufacturers like SKF, FAG and Timken, along with
several local manufacturers such as NEI, NRB, ABC and TATA.
Fig. 1: Domestic industry size (By Source) – INR85bn – <4% of world bearings market
Indian bearings industry

(INR85bn)
India accounts for less than 4% of

the world bearing market; there
exists substantial scope over
longer term, led by localisation of
imports Organised (46%) Unorganised (16%) Imports (38%)
(INR39bn) (INR14bn) (INR32bn)
Source: Industry, Edelweiss research
The unorganised segment largely meets requirements of the replacement market. While
part of 38% imports comes through official channels primarily for industrial applications,
there’s substantial volume of spurious imports, especially in deep groove ball bearings.
Counterfeit bearing products account for ~20-30% of bearings sold in the replacement
market.
Chart 1: Type of demand - OEMs a major demand driver
After market
35%
Industry equally distributed
between automotive and
industrial bearings with OEMs
being a major driver
OEM
65%
Nearly 65% of the demand is derived from OEMs (INR55bn) and balance from aftermarket
(INR30bn). This comprises both auto as well as industrial sales. Auto and industrial bearings
contribute equally to sales.

Bearings
Chart 2: User segments

Electrical
equip. &
others
5%
Heavy Ind.
(incl
Railways)
Automotive 20%
Industry 48% Automobile
52% 48%
General
Engineering
27%
Around 48% of industry sales are to the automobile sector. Bearing companies also have a
diversified profile with substantial industrial business, which is majorly imported. Companies
distribute bearings across a variety of industrial applications—27% of industrial sales are to
general engineering, 20% to heavy industries and balance to electrical equipment and
others.
Chart 3: Type of bearings: Revenue equally divided between ball and roller bearings
Needle Thrust
9% 3%
Spherical Tapered
Ball 17% 42%
Roller bearings
bearings 48%
52%
Cylindrical
29%
Source: Source: Industry, Edelweiss research
The bearings industry is majorly divided between ball bearings (48% of demand) and roller
bearings segments (52% of demand). Within roller bearings, tapered constitute half and
balance is catered by spherical, cylindrical and needle bearings.

Bearings
Table 1: Competitive landscape

Deep grove Spherical Roller Cylindrical roller Needle roller Tapered roller Thrust roller
Type of bearings
ball bearing bearings bearings bearings bearings bearings
Industry size (INR 95 bn) 46 8 14 4 21 1
Application Wide use in two- Car suspension, Machine tools, Niche application in Wide application
wheelers, drive shaft, transmission,wheel- engine, gearbox. in commercial
four-wheelers, heavy machinery set bearings for With less load and vehicles
three-wheelers railway thrust.
(Used in wheel, axles) applications
Transmission, Suspension, Cement & Coal Transmissions Vehicle front Classifiers
Alternators, Gear boxes pulverize Transfer cases wheels Extruders
axles, Wheels, Casters Pumps Compressor Engine and valve Differential and Oil well swivels
Compressors, Pumps, Heavy stationary Gear boxes trains pinion Pumps
Gearboxes, Fans, Industrial Centrifuges Steering and braking configuration Pulp refiners
Electrical goods conveyor Mining Equipments systems Conveyor rolls Machine tools
systems Transmission Axle supports Machine tool
Industrial fans Outbound engines spindles
Power tool copiers Trailer Wheels
Market share SKF - 45% FAG - 45% FAG - 45% NRB - 70% Timken - (40-45%)
Other players FAG SKF National INA Bearings SKF SKF
National National Engineering SKF FAG FAG
Engineers Engineering SKF National Engineers Timken
Timken NRB ABC Bearings
Source: Source: Industry, Edelweiss research
Low competitive intensity: While there is no technology barrier per se, there is a level of
technology-based differentiation achieved by players like SKF and FAG making them
preferred suppliers to OEMs. SKF’s and FAG’s century-long experience in bearing
manufacturing gives them the ability to engage with OEMs from product development stage
and add much more value than a commoditised component supplier. The top-three are
dominant players in different types of bearings and do not compete head on or on pricing.
Low customer concentration: No single customer constitutes more than 10% of SKF’s, FAG’s
or NRB’s revenues.
Industrials catered by imports: Companies have a diversified mix with bearings for
industrial applications catered to by imports from parent.
Variable cost structure: SKF, FAG and Timken procure their raw materials semi-finished for
traded goods, in turn saving in capital investment and cushioning cyclical downturns. This
will change with increasing manufacturing from FAG’s stable.

Bearings
Evolution of domestic bearings industry
Chart 4: Revenue growth healthy through cycles

70,000
56,000 13% CAGR
(INR mn)
Healthy revenue growth through 42,000
the cycles barring last two years 20% CAGR
28,000
8% CAGR
14,000
FY 1999
FY 2000
FY 2001
FY 2002
FY 2003
FY 2004
FY 2005
FY 2006
FY 2007
FY 2008
FY 2009
FY 2010
FY 2011
FY 2012
FY 2013
SKF FAG NRB Timken NEI ABC
Source: Industry, Company, Edelweiss research
Table 2: Domestic manufacturing outpacing industry

Growth% CY09 CY10 CY11 CY12 CAGR (CY09-12)
Overall Bearings 5.3 33.3 6.3 - 12.3
Imports 15.5 33.3 6.3 (0.7) 12.1
Organised 4.0 42.3 16.2 - 18.3
Unorganised (18.9) - (46.4) 6.7 (17.0)
Source: Company, Edelweiss research
Import substitution and plateauing unorganised market

Increasing preference for quality products has resulted in the unorganised replacement
market shrinking in size over the years. The trend during CY09-12 highlights that the
organised market posted 18% CAGR versus the unorganised market’s -17%. Increasing
preference for longevity of product life cycle, lower maintenance and better R&D efforts to
develop new products have led to growth of organised players. Bearings are majorly
imported for the range of products currently being manufactured in India. Going ahead
though, imports will steadily fall as new production facilities are commissioned by organised
players in India. Hence, we expect the organised players to post strong market share gains,
particularly as they pass on the cost benefits when they start manufacturing.

Bearings
Industry revenues (CY12/FY13) and revenue market share of players
Chart 5: The top-5 players in organised bearing market account 79% of revenues
25,000 Timken ABC
India Bearings
20,000 8% 2%
NRB
(INR mn)
15,000 Bearings
7% SKF India
10,000 30%
5,000
NEI ltd
0
13%
Timken India
ABC Bearings
SKF India
FAG Bearings
NRB Bearings
NEI ltd
FAG
Bearings
17%
Source: Industry, Company, Edelweiss research
Note: Numbers of NEI, a CK Birla group company, are as of FY12.
Revenue contribution of top bearings company wise

Each player specialising in a
SKF is a strong player in the ball bearings segment, whereas FAG is leader in roller bearings
particular area ensures low
and NRB leads in the more compact needle roller bearing segment. Break up for Timken
competitive intensity
India is not available, though it is known that it is a major player in tapered roller bearings.
Chart 6: SKF India—Major revenue contributors
Deep grove ball

bearings
35%
Othes
SKF - A strong player in ball 47%
bearings
Tapered roller
bearings
18%

Bearings
Chart 7: FAG Bearings—Major revenue contributors
Cylindrical roller
bearings
Othes 35%
FAG - A strong player in roller 40%
bearings
Spherical roller
bearings
25%
Chart 8: NRB Bearings—Major revenue contributors
Othes
26%
NRB - A strong player in niche

needle roller bearings Needle roller
bearings
58%
Cylindrical roller
bearings
16%
Both FAG and SKF will be beneficiaries of the uptick in automotive and industrial segments
in India with substantial contribution from the above-mentioned segments. SKF on account
of having better distribution network will be a stronger beneficiary of replacement growth
in the industrial segment, as higher proportion of sales is from industrial replacements. NRB,
being a pure auto play, will majorly benefit from the cyclical upturn in the auto OEM
segment. NRB and FAG stand to gain from strong exports due to upsurge in the industry.

Bearings
Revenue mix
Fig.2: SKF India

Revenue
(CY12- INR22bn)
Auto - 45% Industries - 49% Exports - 6%
OEM - 70% Replacement - 30% OEM - 33% Replacement - 67%
Fig. 3: FAG Bearings

Revenue
(CY12- INR14bn)
Auto - 35% Industries - 51% Exports - 14%
OEM - 66% Replacement - 33% OEM - 65% Replacement - 35%
Fig. 4: NRB Bearings
Revenue
(FY13- INR5.9bn)
Auto - 80% Exports - 22%
OEM - 82% Replacement - 18%

Note: NRB’s industrial division has been demerged into a different company (NBIL) since October
2012. However, NBIL contributed a mere 6% to NRB’s revenue at INR347mn.

Bearings
35% of overall revenues from

Stable aftermarket (INR30bn segment)
aftermarket reduces cyclicality Bearings have a service life of more than four years, post which they come up for
replacement. Nearly 35% of the industry contribution is from aftermarket making it an
INR30bn segment in terms of size. Bearing companies’ replacement market exposure helps
them mitigate the cyclicality risk of OEM downturns and provides a favourable pricing
environment.
Chart 9: Aftermarket segment a major contributor

SKF revenue mix: ~40% from aftermarket FAG revenue mix: ~30% from aftermarket
Exports
Exports 14%
6%
OEM
47% Replaceme OEM
Replaceme nt 56%
nt 30%
47%
SKF and FAG derive ~47% and ~30% of their revenues from the aftermarket segment,
respectively. We expect the automotive aftermarket segment to remain stable. Going ahead,
both SKF and FAG are set clock 20% plus CAGR over CY13-15, led by the replacement cycle.
Distribution network
SKF has ~20,000 retailers and ~300 distributers across the automotive and industrial market.
FAG has 200 distributors whereas Timken has 87 distributors.
Competitive edge
Competitive intensity among organised players is low given that each player is dominant in
one of the product segments. SKF, FAG, Timken and NRB have etched strong position in
industry owing to strong product portfolio in their respective segments along with
technology prowess. As a result, these players have been able to partner with the OEMs
right from the product development stage. Going forward we expect the current positioning
to remain the same based on the following factors:
• Increased investments by each continue to protect their turfs.

• Also, strong parentage provides the technological edge in their respective segments.
• Continual innovation will lead to market share gains. New products contribute 10% plus
of revenues for these players.
Thus, their dominant position in the niche areas has reduced the competitive pressures and
provided sustained growth opportunity for each player.

Bearings
Table 3: Competitive advantage

Critical success factor for scoring SKF FAG
Distribution reach (nos.) High (300) Moderate (200)
OEM reach Moderate (47%) High (56%)
Replacement share (% of overall sales) High (47%) Moderate (30%)
Auto (% of overall sales) High (45%) Moderate (35%)
Industrial (% of overall sales) High (49%) High (41%)
Traded sales (% of overall sales) High (43%) Moderate (32%)
Exports (% of overall sales) Low (6%) Moderate (14%)
Imports (% of overall sales) High (26%) Moderate (21%)
Table 4: Technology collaboration of bearing players

SKF India SKF AB
FAG bearings Schaeffler Technologies AG
Timken India The Timken Company
NEI Ltd NTN Japan
NRB Bearings NADELLA GmbH
ABC Bearings NSK Japan

Bearings
Industry drivers
Automotive bearing drivers
Automobile sector is a major driver for the domestic bearings industry with a high ~48%
contribution.
Chart 10: Correlation between bearing and automotive industry revenues

40.0
30.0
Strong correlation between
automotive and bearing industry 20.0
revenues with ~48% contribution
(%)
10.0
0.0
(10.0)
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Bearing industry growth (%) Auto growth
There is a strong correlation between the automobile and bearings industry growth.
Chart 11: 2W industry uptick – SKF a major beneficiary with 58% of auto OEM sales
20 28.2
16 18.8
With ~58% of its OEM revenues 12 9.4

(mn)
(%)
from 2W sales, SKF will be a
major beneficiary led by 10% 8 0.0
growth expected for industry in
FY16E 4 (9.4)
0 (18.8)
FY14E
FY15E
FY16E
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
2W % YoY
The 2W industry is estimated to register 9% volume CAGR over FY14-16, led by better rural
demand, good monsoons and pipeline of product launches by major OEM players like Bajaj
Auto and Honda Motorcycle and Scooter India. Additionally, more than 15 product launches
are expected across OEMs over the next 12-18 months. We expect SKF, which is a market
leader in 2W bearings (derives ~58% of auto bearings revenues) to be a strong beneficiary of
the burgeoning 2W segment.

Bearings
Chart 12: PV to bottom out soon – FAG, major beneficiary with 44% of auto OEM sales
3.5 32.0
2.8 24.0
With ~44% of its OEM revenues 2.1 16.0
(mn)
from PV sales, FAG will be a
(%)
major beneficiary led by 12% 1.4 8.0
growth expected in PV volumes
in FY16E 0.7 0.0
0.0 (8.0)
FY14E
FY15E
FY16E
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
PVs % YoY
PVs may witness back-ended growth in FY15, aided by robust growth in petrol vehicles,
improving rural demand and new product launches. Petrol vehicle sales are set to improve
due to the reducing gap between petrol and diesel prices. Over the next 18 months, ~16-17
new product launches are expected across the OEMs. We estimate PVs to register 9%
volume CAGR over FY14-16E, though more back ended with 12% growth expected in FY16E.
Chart 13: MHCV strong rebound in FY16E – FAG, to benefit with ~30% auto OEM sales
400 60.0
320 40.0
240 20.0
(mn)
(%)
160 0.0
80 (20.0)
0 (40.0)
FY14E
FY15E
FY16E
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
MHCVs % YoY
Post the uptick in 2W and PV segment, going by the historic trend the last leg of demand
uptick is expected in the CV industry. The CV industry is expected to uptick in 2HCY14 and
grow by 11% in FY15 and 23% in FY16 post a 19-20% dip in FY14E.
Despite the current lackluster environment, the OEMs are incurring large capex towards
R&D and product development.

Bearings
Table 5: Capex plans of automobile companies

Capex (INR mn) FY12 FY13 FY14E FY15E
Ashok Leyland 6,753 7,659 2,500 2,500
Mahindra & Mahindra 14,195 12,362 11,000 11,000
Maruti 21,798 23,968 25,000 24,000
Tata Motors 30,802 29,000 25,000 25,000
Hero Motors 6,835 4,001 8,000 8,000
Bajaj Auto 3,000 3,000 3,000 3,000
We expect FAG to be a major beneficiary with uptick in 4W OEM industry and SKF a major
beneficiary led by uptick in 2W OEM industry growth over next 2-3 years.
Overall, post a sluggish CY13 we expect the auto bearings segment of the companies to post
12% growth in CY14 and 19% in CY15 in the OEM segment.
Industrial bearing drivers

Bearing companies have a diversified revenue mix with half the revenues (~52%) coming
from the manufacturing sector (excluding automobiles).
Chart 14: Correlation between bearings and IIP, CGFC and core manufacturing growth
40.0
Strong correlation between
industrial uptick and bearing
30.0
industry revenues with ~52%
contribution
20.0
(%)
10.0
0.0
(10.0)
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Bearing industry growth (%) IIP
As can be seen there is a strong correlation between IIP, manufacturing GDP growth, gross
capital formation in the country and bearings industry growth.
Infrastructure expansion coupled with industrial growth will have a favourable impact on
Demand to revive with improving the Indian bearings market.
macros
Railways
The Indian Railways has earmarked an investment of INR5192bn (FY13-17) in the 12th five
year plan. This is as compared to INR2012bn in the 11th five year plan. This should positively
impact the bearings industry. In railways sector bearings are used in wheel axles, drive units,
traction motors, etc.

Bearings
Power
The Twelfth five-year plan targets an investment of INR15,017bn which envisages an
incremental capacity of 88,537MW. This is as compared to the 53,922MW addition in the
11th plan which had an investment outlay of INR7,285bn. Investment in the renewal energy
segment is projected at a strong INR3,186bn as compared to INR892bn in the previous plan.
In power sector bearings are used in Pulverizers, bowl mills, pumps and material handling.
Mining
The mining industry may witness resurgence with 25-30 mines in Karnataka re-commencing
operations over the next one year. These mines have already secured their Reclamation and
Rehabilitation Plan and are awaiting other statutory approvals. Usage of bearings in Mines:
Shovels, draglines, haul trucks, loaders, crushing, screening and material handling.
While there could be some delays in fresh investments (as measured by GFCF),
manufacturing growth could recover post more clarity in the government policies after the
general elections. With uptick in GDP and IIP from 2HCY14, we expect the industrial bearings
segment to record 16% growth in CY14 and 25% growth in CY15 post de-growth of ~10% in
CY13.
Customs duty savings

As can be seen manufacturing of ball or roller bearings in India helps in 2.5% cost savings. As
a result with increasing localization by players we expect companies to have cost savings.
Table 6: Customs duty structure

Ball/roller bearings (%) Pig iron (%)
Customs Basic Duty 7.5 Customs Basic Duty 5.0
Addl Duty CVD 12.0 Addl Duty CVD 12.0
Spl Addl Duty(Spl.CVD) 4.0 Spl Addl Duty(Spl.CVD) 4.0
Excise Cess 0.0 Excise Cess 0.0
Customs Cess 3.0 Customs Cess 3.0
Source: Industry

Bearings
Steady long-term financials

Revenue growth: SKF and FAG on secular uptrend
SKF’s revenues posted healthy double-digits with 19% CAGR over the longer tenure (ten-
year term - CY02-12) in line with FAG’s 19% CAGR. However, FAG has overtaken SKF in the
last five years, led by strong market share penetration. Going forward, with cyclical uptick in
industry, we expect growth to accelerate for both players.
Table 7: Sales CAGR over the years

CY12 1 year 3 year 5 year 8 year 10 year
(INR mn) growth (%) CAGR (%) CAGR (%) CAGR (%) CAGR (%)
SKF India 22,276 (8.5) 12.0 7.0 18.0 19.0
FAG Bearings 14,467 10.6 22.0 18.0 21.0 19.0
Timken India 6,885 (17.0) 30.0 15.0 12.0 16.0
NRB Bearings 5,916 6.0 19.0 12.0 13.0 14.0
FAG has consistently Table 8: EBITDA CAGR over the years

outperformed peers across time CY12/FY13 1 year 3 year 5 year 8 year 10 year
periods (INR mn) growth (%) CAGR (%) CAGR (%) CAGR (%) CAGR (%)
SKF India 2,584 (13.0) 13.6 - 14.0 16.0
FAG Bearings 2,209 (13.0) 29.0 11.0 20.0 17.0
Timken India 733 (31.0) 21.2 5.2 3.8 13.0
NRB Bearings 1,008 (12.0) 21.3 7.1 9.1 11.8
Table 9: PAT CAGR over the years

CY12/FY13 1 year 3 year 5 year 8 year 10 year
(INR mn) growth (%) CAGR (%) CAGR (%) CAGR (%) CAGR (%)
SKF India 1,900.8 (8.8) 22.0 3.0 16.0 25.0
FAG Bearings 1,591.8 (9.5) 29.0 15.0 23.0 23.0
Timken India 442.4 (45.0) 11.0 3.0 4.0 14.0
NRB Bearings 480.4 (5.6) 30.0 7.0 7.0 14.0
Bearings industry has grown profitably over long term cycles. As can be seen, SKF and FAG
have registered 18% plus CAGR over ten years in sales and PAT as well as in past three years.

Bearings
Gross margins/ EBITDA margins
Chart 15: Gross margins Chart 16: EBITDA margins

60.0 31.0
53.0 26.2
46.0 21.4
(%)
(%)
39.0 16.6
32.0 11.8
25.0 7.0
CY08 CY09 CY10 CY11 CY12 CY06 CY07 CY08 CY09 CY10 CY11 CY12
SKF India FAG Bearings SKF India FAG Bearings
Timken India NRB Bearings Timken India NRB Bearings
Average gross margins of FAG SKF’s and FAG’s overall gross margins at 35-37%. This is despite higher contribution of
and SKF at ~36% despite having traded goods to overall sales. On manufactured basis, both generate ~50% gross margins.
high traded sales SKF has traded goods contribution of 43%, FAG 32% and Timken 25% of overall gross sales.
NRB and NEI have majority manufactured goods. Also, FAG has averaged ~17% EBITDA
margin and SKF at ~12% in last 5 years despite having trading sales led by its product profile
and operational efficiency.
Return ratios
RoE of FAG and SKF looks suppressed owing to huge cash in balance sheet. Core average
RoE of FAG and SKF at 28-29% is higher than NRB’s RoE of 18%.
Chart 17: RoE profile of bearings players

39.0
33.4
Average core RoE of FAG and SKF
at ~29-31% 27.8
(%)
22.2
16.6
11.0
CY10 CY11 CY12
SKF India FAG Bearings NRB Bearings Timken India


Bearings
Table 10: SKF cash flow

(mn) CY10 CY11 CY12 CY13E CY14E CY15E
Operating cash flow 1,159 1,509 1,989 1,543 2,336 2,881
Capex (922) (817) (807) (600) (500) (500)
Free cash flow 238 693 1,182 943 1,836 2,381
OCF yield (%) 3.5 4.5 5.9 4.6 7.0 8.6
FCF yield (%) 0.7 2.1 3.5 2.8 5.5 7.1
Strong growth in operating cash flow and reduction in quantum of capex to lead to
improvement in free cash flow yield from CY14E.
Table 11: FAG cash flow

(mn) CY10 CY11 CY12 CY13E CY14E CY15E
Operating cash flow 1,320 826 1,371 2,050 3,023 3,454
Capex (194) (1,471) (1,407) (640) (1,100) (900)
Free cash flow 1,126 (645) (37) 1,410 1,923 2,554
OCF yield (%) 5.1 3.2 5.3 7.9 11.7 13.3
FCF yield (%) 4.3 (2.5) (0.1) 5.4 7.4 9.9
Higher growth along with better working capital management is expected to result in higher
operating cash flow and strong free cash yield over the next two years.
Table 12: NRB cash flow

(mn) FY10 FY11 FY12 FY13
Operating Cash Flow 759 406 546 344
Capex (116) (358) (1,134) (936)
Free Cash Flow 643 48 (588) (592)
OCF yield (%) 43.5 11.6 15.6 9.9
FCF yield (%) 36.9 1.4 (16.9) (17.0)
Better working capital management will primarily drive NRB’s operating cash flow in turn
leading to higher yield. While the company is financially leveraged, improvement in
operating cash flows will result in free cash flow.
Table 13: Timken cash flow

(mn) CY10 CY11 FY12 FY13
Operating Cash Flow 584 384 341 131
Capex (81) (37) (443) (302)
Free Cash Flow 503 347 (102) (170)
OCF yield (%) 5.3 3.5 3.1 1.2
FCF yield (%) 4.6 3.1 (0.9) (1.5)

Bearings
Working capital
SKF followed by FAG is best in terms of net cash conversion cycle at an average of 42 and 49
days, respectively. NRB has high credit period due to higher auto OEM sales vis-à-vis SKF and
FAG. This is also due to NRB being a pure auto player. Industrial bearings are typically cash
and carry on account of being sold through a distribution network.
Chart 18: Average receivable days

120
SKF and FAG have demonstrated
strong working capital 100
management with average cash
conversion cycle at ~42-49 days (No of days)
80
60
40
20
CY10 CY11 CY12
Chart 19: Average inventory days

245
200
(No of days)
With a variable cost structure, 155

both SKF and FAG have lower
working capital cycle 110
65
20
CY10 CY11 CY12

Bearings
Chart 20: Average payable days

140
Also, industrial sales contribution 116

which is cash and carry, leads to
better credit period
(No of days)
92
68
44
20
CY10 CY11 CY12
Chart 21: Net cash conversion days

220
180
(No of days)
140
With lower asset base, SKF and
FAG have higher fixed asset 100
turnover ratio; even core fixed
asset turnover ratio (excluding
traded revenues) is higher than 60
NRB
20
CY10 CY11 CY12
Asset turn
High FAT ratio and variable cost resulting in superior returns
On lower asset base, SKF, FAG and Timken have higher fixed asset turnover ratio (average of
2.4x). In fact, even the average core fixed asset turnover ratio (excluding traded revenues)
for FAG and SKF at an average 1.6x is higher than NRB at 1.1x. As a result, SKF and FAG have
strong return ratios (28% plus core RoEs and core RoCE of over 40%). With higher variable
cost structure, both SKF and FAG have lower working capital cycle of an average 42-49 days
as compared to ~190 days for NRB.

Bearings
Chart 22: Strong core fixed asset turn for FAG, SKF, Timken
CY12
CY11
CY10
0.0 0.5 1.0 1.5 2.0 2.5

(x)
Timken India NRB Bearings FAG Bearings SKF India
Capex
Capacity expansion is currently on-stream, with the companies preparing for next leg of
demand upswing.
Chart 23: Capital outlay

1,600
1,280
Strong growth on massive
expansion and utilisation; SKF
incurred INR2.5bn over CY10-12; 960
(INR mn)
we have assumed further

INR1.6bn over CY13-15E; FAG 640
incurred INR3.5bn over CY11-13;
we have assumed further INR2bn
320
over CY14-15E
0
CY10 CY11 CY12 CY13E CY14E CY15E
SKF FAG
SKF incurred significant capex of INR2.5bn in the past three years at an average run-rate of
INR850mn per year, which is expected to taper off to INR1.6bn over CY13-15 or at an
average run-rate of INR500-600mn per year. Currently, the company has capacity utilisation
of ~65%, which it intends to increase going ahead.
FAG invested INR3.5bn in the past two years and proposes to further invest INR3.3bn over
the next few years. We have assumed INR2bn over next few years. We expect the company
to log strong growth on massive capacity expansion and on basis of operating at full capacity
in CY11.

Bearings
Exports
Exports a major contributor for
Timken and NRB at 26% and 22% Exports’ contribution to revenues of the different companies is as follows: 6% of SKF, 14% of
of revenues respectively; 14% of FAG, 22% of NRB and 26% of Timken’s revenues, as on CY12/FY13. The parent companies
FAG’s sales and 6% of SKF’s sales source goods from their Indian subsidiaries (SKF India, FAG and Timken) to avail advantages
of low-cost operations. Exports have grown the fastest for NRB at 28% CAGR over CY07-12.
Over the mentioned period, SKF’s registered exports at -2% CAGR, FAG at 18% CAGR and
Timken at 10% CAGR.
Chart 24: Export sales Chart 25: Exports as a % of sales

2,533 50.0
2,070 40.0
1,606 30.0
(INR mn)
(%)
1,143 20.0
679 10.0
216 0.0
CY07 CY08 CY09 CY10 CY11 CY12 CY07 CY08 CY09 CY10 CY11 CY12
SKF FAG NRB Timken SKF FAG NRB Timken
Imports
SKF, FAG and Timken import a sizeable portion of raw materials and finished goods. The
three Indian players primarily import industrial bearings from their parent company, which
complements their domestic production. Imports contribute 33-35% of both SKF’s and
FAG’s revenues, and 21% of Timken’s revenues. As a result, their business model is asset
light and the cost structure is substantially variable, which helps during a downturn.
While SKF India manufactures industrial bearings on a small scale (6-7% of its industrial
sales), in CY10, subsidiary SKF Technologies started domestic manufacturing, for which SKF
will be a distributor. We believe increasing local manufacturing will help reduce the lead
time and costs. FAG manufactures industrial bearings to the extent of 18-19% of industrial
sales and started production of large size bearings at its Savli plant towards CY12 end. With
manufacturing operations in industrial segment expanding for both FAG and SKF (through
SKF Technologies) we expect imports to gradually decline over time.

Bearings
Chart 26: Imports

10,000
Increasing localisation to result in
declining imports over time 8,000
6,000
(INR mn)
4,000
2,000
0
CY07 CY08 CY09 CY10 CY11 CY12
SKF FAG NRB Timken
Chart 27: Imports as a % of sales
50.0
40.0
30.0
(%)
20.0
10.0
0.0
CY07 CY08 CY09 CY10 CY11 CY12
SKF FAG NRB Timken

Bearings
Global bearings industry: USD51bn in size
The global bearings market is estimated at over USD51bn in 2012, growing at 1-2% in local
currency. Asia is the largest bearings region with almost 50% of the total, having grown from
less than 30% ten years ago. Europe and Americas now account for less than 25% of the
The Asian bearings industry has
world market. China’s share of the world’s bearing market was slightly down to ~25%.
grown from 30% ten years ago to
Japan’s share of the world bearing market has increased slightly, but the domestic Japanese
~50% now; Europe and America
now account for less than 25% of bearings demand still accounts for less than 15% of the world total. Other Asian markets
the world market with sizeable bearing production and growth in recent years include India, Thailand,
Indonesia, Malaysia and the Republic of Korea. As per a market research report, the global
automotive bearings market is expected to post CAGR of 7.42% over 2014-18.
SKF is the global market leader in ball bearings with an estimated market share of ~20%,
followed by the Schaeffler Group’s brands INA/FAG at ~18%, Timken (US) at ~12% and the
Japanese NSK and NTN at ~10% and ~7%, respectively. The top 3 Chinese producers hold 3%
of the global market, despite being in the largest region in terms of demand, which
highlights fragmentation levels of the Chinese bearings market.

Bearings
Definitions
Bearing is a machine element used to support load and reduce friction in moving parts. The
bearings industry is classified into: a) bimetal bearings; and b) antifriction bearings (includes
ball bearings and roller bearings). The rolling element acts as a differentiator in a bearing.
Roller bearings are named after the rollers’ shape, such as cylindrical roller bearings, needle
roller bearings, tapered roller bearings, spherical roller bearings and thrust roller bearings.
The choice of bearing primarily depends on revolutions per minute (RPM) and load.
Deep groove ball bearings are versatile, self-retaining bearings with solid outer rings, inner
rings and ball and cage assemblies. These products are of simple design, durable in
operation and easy to maintain; they are available in single and double row designs and in
open and sealed variants. These are generally less customised and available ‘off the shelf’.
Due to their low frictional torque, they are suitable for high speed RPM and medium load
requirements.
Cylindrical roller bearings are very rigid, can support high radial loads, and due to the cage,
are suitable for higher speeds than the full complement designs. Bearings with suffix E have
a larger roller set and are thus designed for extremely high load carrying capacity. The
bearings can be taken apart and can therefore be fitted and dismantled more easily. Both
bearing rings can therefore have an interference fit.
Spherical roller bearings are double row, self-retaining units comprising solid outer rings
with a concave raceway, solid inner rings and barrel rollers with cages.
Needle roller bearings come with cylindrical rollers that are small in diameter. Needle roller
bearings are used in medium RPM, high-load requirements compared to ball bearings,
which are used in high RPM, medium-load requirements.
Tapered roller bearings comprise solid inner and outer rings with tapered raceways and
tapered rollers with cages. The bearings are not self-retaining. As a result, the inner ring
together with the rollers and cage can be fitted separately from the outer ring. Tapered
roller bearings can support axial loads from one direction as well as high radial loads.

Bearings
THIS PAGE IS INTENTIONALLY LEFT BLANK

INITIATING COVERAGE
FAG BEARINGS
Growth uninterrupted
India Equity Research| Bearings
FAG Bearings (FAG) is India’s second largest bearing company, with an EDELWEISS RATINGS
overall and roller bearings market share of ~17% and 45%, respectively. Absolute Rating BUY
In the past five years, the company has outpaced industry with 18% sales Investment Characteristics Growth
CAGR, 15% operating margin, average core RoCE of 48% and 23% RoE.
High exposure to passenger vehicles (~45% of auto OEM sales) will drive
MARKET DATA (R: FAGB.BO, B: FAG IN)
FAG’s revenues. Considering significant ramp up in manufacturing
CMP : INR 1,600
capacity (2.1x in gross block over CY10-15), the company is well placed to
Target Price : INR 2,022
capitalise on structural opportunity of India becoming one of the major
52-week range (INR) : 1,679/1,100
manufacturing hubs of global OEMs as well as localisation of industrial
Share in issue (mn) : 16.6
sales. Parent’s (Schaeffler Group) sharpening focus on India and higher
M cap (INR bn/USD mn) : 27 / 427
localisation will be catalysts of strong sales growth and margin
Avg. Daily Vol. BSE/NSE (‘000) : 5.2
expansion. Hence, we initiate coverage with ‘BUY’.
SHARE HOLDING PATTERN (%)
Huge capital outlay to drive growth and margin
Current Q1FY14 Q4FY13
With gross block expected to catapult 2.1x over CY10-15E, we have assumed 21% CAGR Promoters * 51.3 51.3 51.3
in manufacturing sales over CY13-15. Also, FAG is localising industrial production of large 18.6 16.6 16.6
MF's, FI's & BKs
size bearings. With increasing capacity utilisation and gradual lowering of trading sales
FII's 15.0 15.9 16.0
(by 400bps over CY12-15E to 27.8% of sales), we expect gross and operating margins to
Others 15.2 16.2 16.1
catapult 67bps and 203bps to 37.9% and 14.9%, respectively, over CY13-15E. * Promoters pledged shares : NIL
(% of share in issue)
Mission India: Double share in parent’s turnover; exports hub

PRICE PERFORMANCE (%)
Indian operations currently contribute less than 4% to the group's annual turnover;
Stock over
with expansion in portfolio and capacity (augmenting gross block by 2.1x over CY10- Sensex Stock
Sensex
15E) and the R&D set up, the parent aims to increase India contribution to ~8-10%.
1 month (2.8) (4.5) (1.7)
This is in line with its strategy of not only tapping the growing domestic market, but
3 months (1.9) 13.7 15.6
also using India as a significant hub for exports to the US, Europe and Asia.
12 months 4.9 182.5 177.5
Outlook and valuations: Robust bearing; initiate with ‘BUY’

We estimate FAG’s earnings to surge 31% and 32% in CY14 and CY15, respectively,
post (-24%) in CY13. This growth will be led by robust rise in manufacturing sales post
capacity addition in auto as well as industrial division. The stock is trading at 16.3x and
12.3x CY14E and CY15E P/E, respectively, closer to mid band of its historical valuation.
We initiate coverage with ‘BUY’ and target price of INR2,022, valuing the company at
16x CY15E earnings, implying 30% upside from current level.
Financials
Year to December CY12 CY13 CY14E CY15E
(Click on image
Net revenues (INR mn) 14,467 14,300 16,764 20,343 to view video)
Shradha Sheth
EBITDA (INR mn) 2,204 1,836 2,319 3,024 +91 22 6623 3308
Core profit (INR mn) 1,592 1,218 1,591 2,100 shradha.sheth@edelweissfin.com
Diluted shares (mn) 17 17 17 17 Manoj Bahety, CFA
EPS (INR) 95.8 73.3 95.8 126.3 +91 22 6623 3362
P/E (x) 16.3 21.3 16.3 12.3 manoj.bahety@edelweissfin.com
EV/EBITDA (x) 10.2 11.7 8.8 6.3

ROAE (%) 19.8 13.1 15.0 17.1 February 19, 2014
Edelweiss Research is also available on www.edelresearch.com,

Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Bearings
Investment Rationale
Market leader in less competitive roller bearings
FAG is part of the Schaeffler Group, the second largest player in bearings and world‘s
leading manufacturer of roller bearings and linear products. In India, the company
commands an overall market share of ~17% with leadership in the roller (spherical and
India, a strong focus area for cylindrical) bearings segments with ~45% share. In the spherical roller bearing segment, it is
parent, with vision to take its the market leader with around 56% share. The company also has substantial market shares
contribution to global turnover of around 35% and 19% in the cylindrical roller bearings and ball bearings segments,
to 8-10% from ~3% currently respectively. Roller bearings face little less counterfeiting than deep groove ball bearings.
This enables FAG enjoy superior margin in roller bearings in the aftermarket compared to
other products.
Strong consistent performance outpacing industry historically

Historically, FAG has grown consistently and outpaced peers on growth and margin front,
owing to its extensive exposure to the high-growth PV industry. Over the past five years, the
company posted strong 18% CAGR in sales and 15% CAGR in PAT.
Table 1: Performance through the cycles

1 year 3 year 5 year 8 year 10 year
CY13 (INR mn) growth CAGR (%) CAGR (%) CAGR (%) CAGR (%)
Sales 14,300 (1) 22 18 21 19
Strong product positioning in EBITDA 1,836 (17) 35 11 20 17
roller bearings with 45% market PAT 1,218 (23) 34 15 23 23
share and overall 15% market Source: Company
share Note: For 3 years, 5 years, 8 years and 10 years we have taken CY12 base to make it comparable
since SKF has yet not declared results
Strong automotive relationships, high exposure to passenger vehicles

to drive growth
FAG derives 35% revenue from automotive segment, of which 66% is OEM. By virtue of the
company’s high exposure to four-wheelers in the OEM segment (~44% and 30% in PVs and
CVs, respectively) we expect its auto (OEM) bearings segment revenue to post 15% CAGR.
Our optimism is underpinned by the pent up demand, improving rural demand riding a good
monsoon and new product launches (16-17 product offerings scheduled by OEMs over the
next 18 months).
Also, FAG globally derives 69% of its overall revenue from the automotive segment. Ergo,
the company is the preferred bearing systems supplier to world’s leading manufacturers of
cars and trucks like GM, Ford, Volkswagen, Volvo and Daimler Chrysler, to name a few.
Almost all these players are looking to enhance their presence in India. This gives FAG a
competitive edge over peers in the supply of bearings to these OEMs in India.

FAG Bearings
Chart 1: Uptick in Passenger vehicles industry on pent up demand from FY15E

3.5 32.0
Expected uptick in its key OEM 2.8 24.0

segment – 4W (PV+CV) accounts
for ~75% of its overall auto OEM 2.1 16.0
(mn)
sales - we expect automotive sales
(%)
to log 19% CAGR over CY13-15E 1.4 8.0
0.7 0.0
0.0 (8.0)
FY14E
FY15E
FY16E
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
PVs % YoY
Table 2: New product launches over next 1-2 years

Company Brand Segment Timeline Remarks
Nissan Datsun Go Compact Q1FY15 On Micra platform; Compete with Alto, Eon etc
Datsun Go Plus MPV FY15 Compete with Ertiga
Datsun Go Sedan Sedan FY15 On Go platform
Micra Compact FY16 Refresh; based on modular CMF-A platform
Renault Lodgy MPV FY16 Compete with Ertiga/Innova
Hyundai Xcent Compact Sedan Q1FY15 Compete with Dzire
GC Compact SUV FY16 i20 Platform; Sub 4m
Honda Mobilio MPV Q3FY15 based on Brio platform; Compete with Ertiga
new Jazz Premium Compact Q3FY15 Known as Fit in Japan;
Honda Vezel Compact SUV FY16 mini CRV looking; Petrol/Diesel engines from City/Amaze
Maruti Celerio Compact Feb-14 First with AMT Technology
Ciaz Premium Sedan FY15 end New SX4; Compete with City/Verna
SX4 S-Cross Crossover FY15 SX4 Crossover; Compete with XUV, Duster
Y9T LCV FY16 First LCV with 800cc diesel engine
YBA Compact SUV FY16 Sub 4m; Built for India; Rivals Ecosport
Tata Motors Bolt Compact Q2FY15 Based on Vista platform; to replace Vista
Zest Sedan Q2FY15 Based on Manza platform; to replace Manza
Nexxon Compact SUV
M&M S-101 Compact SUV FY16 Sub 4m; Price 4L; Monocoque construction
Ford Figo sedan Compact Sedan FY15 Compete with Dzire
New Fiesta Sedan FY15 Fiesta refresh
VW Taigun Compact SUV FY17 Compete with Ecosport
Fiat Avventura Compact SUV H2FY15 Compete with Ecosport
GM Adra Compact SUV FY17
Toyota Etios Cross Crossover Q1FY15

Bearings
Table 3: Capex plans of players (INR m)
Strong automotive relationships Capex FY12 FY13 FY14E FY15E
Ashok Leyland 6,753 7,659 2,500 2,500
with ~44% of OEM revenues
Mahindra & Mahindra 14,195 12,362 11,000 11,000
from passenger vehicles and
Maruti 21,798 23,968 25,000 24,000
~30% from commercial vehicles
Tata Motors 30,802 29,000 25,000 25,000
Huge capex for automotive, as well localisation of industrial bearings to

drive growth
Capital outlay of INR3.5bn in past Led by ~135% capacity utilisation in CY10 in the manufacturing segment, FAG undertook
three years; further capex of huge capex of INR3.5bn in the past three years to gear for growth. As a result, the company
INR3.3bn planned over next few enhanced capacity towards advanced generation three-wheel bearing cell and
years; we have assumed INR 2bn technologically superior X-life cylindrical and spherical roller bearing production at its
over next two years existing plant at Vadodara. Also, in October 2012, it commissioned a new plant at Savli (near
Fag has generated fixed asset Vadodara) for manufacturing low friction ball bearings and large-size bearings. Savli plant
turnover of 1.8X historically has a capacity of 36mn ball bearings units per year and 12,000 pieces per year of large scale
bearings. Currently, FAG primarily imports industrial bearings (traded) from the parent
company. It derives 51% revenue from industrial bearings, of which while ~32% is from
trading, 19% is out of manufacturing. In line with its long-term strategy to invest in
qualitative growth, FAG has started further localising industrial production of large-size
bearings.
We expect a significant benefit with increase in India-made industrial bearings post the
planned expansion as it will reduce lead time and cut costs by way of lower manufacturing
costs and substitution of advalorem import duties.
We anticipate the massive capacity expansion of INR3.5bn (85% expansion on CY10 gross
block) to significantly boost growth. Further, capex of INR2bn (28% expansion on CY13 gross
block) is estimated over CY14-15. As a result, overall gross block will catapult 2.1x over
CY10-15E. We have assumed incremental manufacturing sales of INR5.7bn over CY11-15E,
on this overall capex of INR5.5bn over CY11-15E, a fixed asset turn of 1x. The company has
historically generated average core fixed asset turn of 1.8x. We have assumed 21% CAGR in
manufacturing sales over CY13-15E versus 15% CAGR in past five years.

FAG Bearings
Chart 2: More than doubling of gross block over CY10-15E

9,200 3.0
Third generation
wheel bearing 8,000 2.6
plant commissioned
at Vadodara in 2011 6,800 2.2
(INR mn)
(X)
5,600 1.8
4,400 1.4
3,200 1.0
CY09 CY10 CY11 CY12 CY13 CY14E CY15E
Gross block Asset turn

Significant capex outlay (gross Source: Company, Edelweiss research
block doubling over CY10-15) is
in line with parent’s vision to The Savli plant is expected to reduce dependence on trading sales over time. Contribution of
double India’s contribution trading sales is expected to dip from 31.8% in CY12 to 27.6% in CY15E and stimulate
profitability.
Chart 3: Increasing manufacturing sales trajectory

7,230 42.0
6,050 30.6
4,870 19.2
(INR mn)
(%)
3,690 7.8
Strong capex and automotive and 2,510 (3.6)

industrial uptick to lead to 21%
CAGR in manufacturing sales over
1,330 (15.0)
CY13-15E
CY07 CY08 CY09 CY10 CY11 CY12 CY13E CY14E CY15E
Traded bearings % Growth % of sales


Miscellaneous
Chart 4: Trading sales to gradually moderate
7,230 42.0
6,050 30.6
4,870 19.2
(INR mn)
(%)
3,690 7.8
2,510 (3.6)
1,330 (15.0)
Increasing manufacturing
capacity to reduce trading sales
contribution by 400bps over Traded bearings % Growth % of sales
CY12-15E to 27.8% Source: Company, Edelweiss research
Lower traded sales, higher capacity utilisation to boost margin

FAG’s overall gross margin stood at ~37% in CY12. Its manufacturing margin stood at ~49%
and traded margin at ~15% in CY12. In the latter, the company fetches only distribution
margin, which suppresses overall margin. Traded goods, which contribute 32% to overall
sales, are mostly imported from parent group company (Schaeffler Tech. AG, Germany). The
company has generated an overall average EBITDA margin of 17% in the past five years.
With increasing capacity utilisation and lower traded sales (import substitution) we expect
improvement in gross margin and operating margin by 67bps and 203bps to 37.9% and
14.9%, respectively, over CY13-15E. Ergo, we expect 28% CAGR in operating profit over
CY13-15E.
Chart 5: Superior EBITDA margins, set to further improve

49.0 25.0
Increasing manufacturing sales

45.0 22.0
and operating leverage to lead to
gross and operating margins
41.0 19.0
surging 67bps and 203bps over
(%)
CY13-15E to 37.9% and 14.9%,
(%)
respectively 37.0 16.0
33.0 13.0
29.0 10.0
CY08 CY09 CY10 CY11 CY12 CY13 CY14E CY15E
Gross margin (%) EBITDA margin (%)


FAG Bearings
Parent envisions higher contribution from India; make it exports hub

India to account for ~8-10% of global market turnover over next few years
Schaeffler’s India vision is to reach EUR1bn in sales in 2020, implying 15% plus CAGR over
the next eight years (from sales of ~EUR0.3bn in CY12 for the group).
India to be exports hub to US, Europe, Asia: The Indian operation currently contributes less
than 4% to the group's annual turnover. However, with the expanding portfolio, capacity
and the R&D set up, the company’s share will more than double. India will contribute more
than 8-10% to the group’s global turnover as the company intends to tap not only the
growing domestic market, but also use India as a significant hub for exports to the US,
Europe and Asia.
Strengthening R&D to retain innovation edge: Banking on a strong global R&D network, the
parent intends to considerably strengthen innovation capabilities in Asia Pacific, to cater to
Schaeffler’s India vision: EUR1bn the region’s customers. India, which is the centre of R&D excellence for the group's
in sales in 2020 from ~EUR0.3bn motorcycle and tractor business, is expected to play a larger R&D role in other areas of
in CY12; more than 15% CAGR automotive and engineering businesses going ahead. FAG will invest close to INR500mn on
R&D for the group, and will be doubling the number of engineers to 400 in the next couple
of years. Globally, the Group’s target is to maintain pole position in patent applications by
innovating continuously and maintaining R&D expense at 5% of annual sales. In CY12,
Schaeffler’s R&D expenses surged 19.8 % to EUR593mn (CY11: EUR495mn) or 5.3% of
revenue (CY11: 4.6 %).
Augmenting investments: Schaeffler’s target is to further expand the local production

network. In the group’s global scheme of things, Asia Pacific is one of the key regions where it
Plans afoot to make India envisages robust growth and sales over the long term. Hence, the group has chalked out plans
significant hub for exports to US, to invest around EUR300mn in Asia, of which EUR154mn will be invested in India over the next
Europe and Asia few years. We assume half of this capex has already been met. The Schaeffler Group opened
new plants in India, Thailand and China, consistently implementing its “in the region, for the
region” strategy. FAG currently operates 13 production sites (out of total 70) in the Asia Pacific
region and more than half of the production is planned in the high growth Asia region.
Table 4: Planned greenfield sites and plant extensions for 2012-2014: Customer
proximity – “In the region, for the region” strategy
Particulars
Savli, India
Pune, India
Hosur, India
Irapuato, Mexico
Kysuce, Slovakia
Skalica, Slovakia
Szombathely, Hungary
Brasov, Romania
Nanjing, China
Yinchuan, China
Taicang 5, China
Taicang 6, China
Suzhou, China
BienHoa City, Vietnam

Miscellaneous
Focusing capital expenditure on growth regions such as India, China, and Russia is part of
the Schaeffler Group’s strategy to protect its competitive edge and leading position in the
Strategic Roadmap 2016 market. This will help the company to continue surpassing the market growth.
Launched
Represents a shared vision of
New product pipeline to spur growth
Schaeffler Asia Pacific region.
FAG was successful in adding over 100 new products to its portfolio in 2012. The company
Regional goals and strategic
will invest close to INR500mn on R&D for the group in India, and will double the number of
direction to realise a strong engineers to 400 over the next couple of years.
competitive position for Schaeffler
in this region articulated.
FAG Double-Row Angular Contact Bearings X-life
Double row angular contact ball bearings of X-life quality offer a longer operating life,
especially in use under axial load conditions.
They are therefore particularly suitable for use in pumps and agricultural machinery, for
applications in conveying equipment and packaging equipment, elevators and compressors.
FAG Spherical Roller Bearings E1 X-life

FAG E1 spherical roller bearings are used in all kinds of applications where heavy loads have
to be accommodated or where shaft deflections or misalignments of bearing seats must be
compensated for. They operate reliably in the harshest environmental conditions, for
example in gearboxes, paper machines, construction machinery and vibrating machinery.
FAG Cylindrical Roller Bearings X-life

With improved surface quality, the load ratings of X-life cylindrical roller bearings have been
increased even further in engineering applications. The dynamic load rating is 18 % higher
than in the older style used cylindrical roller bearings. The basic rating life has increased by
up to 70 %.
In 2012, FAG was presented with

an award for Excellence in Design
and Development by Maruti Suzuki
India

FAG Bearings
Valuation
FAG, the second largest bearing player in India, is structurally well positioned with strong
demand drivers for auto and industrial bearings. Strong gross block addition (doubling over
CY10-15E), demand uptick and localisation of industrial traded sales will be catalysts to the
company posting 31% and 32% earnings in CY14E and CY15E, respectively, post -24%
inCY13. A diversified portfolio, leadership in the differentiated cylindrical and spherical
bearings, a formidable service network and strong parentage equip it with significant
competitive advantage. We believe localisation of industrial sales will lead to narrowing of
the discount to the market leader, SKF, rendering improved visibility to gross margin
expansion.
Given the weak macro environment, we believe FAG maintaining its cash flow is
Stock to trade at a premium to its commendable and this could improve in the near future despite the huge capex. We expect
historic valuation at 16x CY15E free cash flow over the next two years to be INR4.4bn (versus INR3.4bn in past six years).
with strong capacity uptick in As a result, we expect the company’s net cash to stand augmented by 1.7x to
manufacturing sales, earnings INR339/share in CY15E (22% of current market cap). Further, the company’s EBITDA margin
CAGR of 31%, direct beneficiary is likely to expand led by new value-added products, gross margin expansion and operating
of rising localisation; strong focus leverage. The company has a strong earnings growth trajectory, debt-free balance sheet and
area of the parent robust cash flows with healthy average RoE and core RoCE of ~22% and 44%, respectively.
At current market price, FAG is trading at P/E of 16.3x CY14 and 12.3x CY15 earnings
estimates. It is trading slightly above mid-end of its historic valuation; on a relative basis,
SKF is trading at 12x CY15E below mid band of its valuation. FAG is expected to deliver net
profit CAGR of 31% over CY13-15E. We believe the stock is a re-rating candidate given its
consistent track record, direct beneficiary of localisation of industrial sales, strong returns
profile and earnings growth trajectory. Hence, we initiate coverage on the stock with ‘BUY’
recommendation and target price of INR2,022 based on 16x CY15E EPS, at higher band of its
valuation.
Table 5: Peer comparison

Companies Currency Mcap Core EPS Growth (%) P/E (x) ROE (%)
(INR bn) CY13/FY14E CY14/FY15E CY15/FY16E CY13/FY14E CY14/FY15E CY15/FY16E CY13/FY14E CY14/FY15E CY15/FY16E
Domestic Players
SKF INR 33.5 (7.8) 22.7 29.9 19.1 15.6 12.0 14.3 15.7 17.9
FAG INR 25.9 (23.5) 30.6 31.9 21.3 16.3 12.3 12.8 13.8 14.9
NRB* INR 4.8 (17.9) 37.5 20.0 9.0 6.5 5.5 21.9 17.9 22.0
Global Players*
Timken USD 361 (33.7) 19.4 22.0 19.3 16.2 13.3 14.1 21.4 27.7
SKF AB SEK 689 (24.4) 47.8 17.8 20.6 13.9 11.8 4.4 24.8 25.9
NSK JPY 37829 112.4 35.5 12.8 18.2 13.4 11.9 10.9 12.1 11.9
Source: Bloomberg, Edelweiss research
Note: *NRB and Global players estimates are as per bloomberg

Miscellaneous
Chart 6: One year forward P/E
2,500
2,000
15x
1,500
(INR )
13x
11x
1,000 9x
7x
500
Aug-10
Aug-11
Aug-12
Aug-13
Apr-04
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Feb-11
Feb-12
Feb-13
Feb-14
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10

FAG Bearings
Key Risks
Delay in recovery in key segments
Slowdown in four-wheeler sales momentum can impact our sales growth projections since
four wheelers and commercial vehicles together contribute ~75% to FAG’s auto OEM
revenues.
Forex fluctuation
FAG buys traded goods from group company (Schaeffler Tech AG, Germany). As a result, INR
depreciation against EUR may negatively impact margin on these EUR-denominated
imports. Imports constitute 33% of net sales. This also includes currency headwinds on
~34% of raw material costs (~11% of net sales) which are imported. Netting exports, which
are 14% of sales, the company’s overall net imports constitute 19% of net sales. However,
the impact of forex fluctuation is limited as FAG follows a policy of hedging exposure over 4
quarters.
Royalty rate increase

Currently, royalty, trademark and service fees as a percentage of overall sales stand at 2%.
Any increase in the same could pose a risk.
Delay in ramping up Savli facility

Any execution delay in ramping up the Savli plant could impact growth as well as our
earnings estimates.
Japanese competition
International players like NSK, Nachi and Koyo are setting up base in India. This will heighten
competition in the auto bearings industry over the long term.

Miscellaneous
Company Description
Fig. 1: Evolution of FAG Bearings India

1962 1964 1969 1975 1986 1992 1997
Precision Production FAG Germany Expansion: Name of the Brand name Commissioned
Bearings India commenced at acquired shares Railway bearing Company changed to changed from export oriented
Limited was Vadodara Plant from Norma plant was FAG Bearings India NORMA to FAG unit for cylindrical
incorporated Hoffman commissioned LimitedNorma roller bearings
HoffmanPlant
1999 2001 2003 2007 2010 2011 2012

Commissioned FAG Validation Centre Introduced Commenced Commissioned Savli plant commiss-
India's first Wheel became a set up E1 Spherical advanced X-life 3rd Generation ioned atVadodara
Bearing Plant at part of Schaeffler at Vadodara Roller Bearings bearing Wheel Bearing which caters to ball
Vadodara Limited from Group production at Plant at bearings and large
Norma HoffmanPlant Vadodara Vadodara size industrial bearings
Source: Company
About FAG Bearings India

FAG is part of the Schaeffler Group of Germany, a leading global supplier in bearings with
revenues of EUR11bn (as of CY12). FAG, Germany, holds 51% stake in the company. In India,
FAG is the second largest player with market share of ~17% and ~45% in overall bearings
industry and roller bearings segment, respectively. The company’s business spans across
rolling bearings and services systems. Within bearings, the company caters to automobile
OEM bearings, automobile aftermarket bearings, industrial OEM bearings, industrial after
market bearings and exports. Strong technological prowess and rich product portfolio
enable the company to partner with OEMs right from the product development stage. It has
a technology licence agreement with parent and pays royalty and technical fees of ~2% of
revenues.
While the company manufactures automotive bearings and part of industrial bearings
(~35%), balance 65% of industrial bearings are imported. As a result traded (industrial)
goods constitute 32% of overall revenue, which are majorly imported from overseas
Schaeffler Group companies. The company also exports 14% of its sales to the Schaeffler
Group.
FAG is No.2 player in Indian FAG has plants at Vadodara with capacity of 51 mn, production of 78mn units and operating
bearings market with ~17% at 154% utilization as on CY11. In terms of reach, the company has a pan-India presence
market share with ~200 distributors. The Savli plant, which was set up in CY12, increased company’s ball
bearings capacity by 36mn units to 86.9 mn.
In India, FAG’s exposure to the auto segment is 35%. 14% of sales are catered to by exports.
Within the auto segment, the company has high exposure to PV and CV segments (catering
to ~44% and ~30% of auto OEM bearings revenues respectively). Within automotive
revenue, ~66% is catered to OEMs and ~34% comes from replacement. Balance 51% of
overall revenues comes from industrial sales. Within industrial, ~65% is catered to OEMs
and 35% comes from replacement.
FAG’s joint venture company, FAG Roller Bearings, manufactures taper roller bearings at its
Chakan unit near Pune.

FAG Bearings
The company has identified India as one of its major growth markets. FAG, a listed entity in
India, currently has two production sites and one R&D center employing over 1,580. The
company’s plants are situated at Maneja (Baroda) and Savli (Baroda). Parent also has
unlisted companies INA India (majorly catering to needle roller bearings) and Luk India
(~22% market share in clutches). These companies posted sales of INR5bn and INR2.7bn,
respectively, in Dec 2012 and Dec 2010 respectively. INA’s plant is located at Talegaon
(Pune) and Luk’s plant is located at Hosur (Tamil Nadu).
Chart 7: Business mix as on CY12

Exports Auto OEMs - Others
14% 4W,CV 1%
17%
Auto OEMs -
Traded
Industrial 2W
32%
aftermarket 6%
18%
Auto
aftermarket
12%
Manufactured
Industrial 67%
OEMs
33%
Chart 6: Segment wise applications

Segment Product
Automotive Ball bearings
Tapered roller bearings
Barrel roller bearings
Automotive Aftermarket Deep grove ball bearings
Seals
Industrial Spherical and cylindrical roller bearings
Angular contact ball bearings
Axial Spherical roller bearings
Self aligning bearing
Industrial aftermarket Replacement part with service solutions

Miscellaneous
Chart 8: Sales break up trend
24,000
19,200
(INR mn)
14,400
9,600
4,800
Manufacturing to be on an
uptrend with 21% CAGR in sales
expected over CY13-15E versus 0
16% CAGR in traded sales CY08 CY09 CY10 CY11 CY12 CY13E CY14E CY15E
Manufactured Traded
Over CY07-12, trading revenues CAGR is at 24% versus 15% for manufactured. Going
forward we estimate 21% CAGR in manufacturing sales and 16% CAGR in trading sales over
CY13-15E.
Chart 9: Sales break up

17,000
13,600
10,200
(INR mn)
6,800
3,400
0
Domestic Exports

FAG Bearings
Chart 10: Export sales trend

3,600 25.0
2,960 21.0
Exports constitute 14% of sales;
having posted 18% CAGR over 2,320 17.0
(INR mn)
(%)
CY07-12, we have assumed 15%
CAGR going forward 1,680 13.0
1,040 9.0
400 5.0
CY09 CY10 CY11 CY12 CY13E CY14E CY15E
Exports % of revenues
Over CY07-12, domestic as well as exports sales posted 18% CAGR. We have assumed only
15% CAGR in sales in exports over CY13-15E. This we believe is conservative going by the
parent’s vision to make India a significant hub for exports to the US, Europe and Asia over
the long term.
Schaeffler Group (Global)

The Schaeffler Group of Germany is the second leading global supplier in bearings with
revenue of EUR11bn (as of CY12) and 18% operating margin. But the revenues generated
from operations in direct competition with SKF are estimated to be closer to ~EUR7bn.
Being a second largest bearing company, FAG has been in existence since 1883. Schaeffler
develops bearings with its INA, LuK and FAG brands. The Schaeffler Group is an international
supplier to the automotive industry and is one of the world‘s leading manufacturer of roller
bearings and linear products. Group companies are based in Germany and are controlled by
Schaeffler Group of Germany is the the Schaeffler family. Europe is the largest market with 59% of group’s revenues;
second leading global supplier in automotive is the major division, representing 69% of sales. With over 76,000 employees
bearings with revenues of €11bn (as
worldwide, Schaeffler is one of the largest German and European industrial companies in
of CY12), 18% market share and
strong 18% operating margin. family ownership. With 180 locations in over 50 countries and more than 70 plants, it has a
robust worldwide network.
The company has two main divisions (auto and industrial) with top three positions in core
market sectors. FAG has a highly diversified base. Within the automotive division
contributing 69% to overall sales, FAG is catering to ~7,500 customers, with top 10
customers contributing 53% to automotive sales. Within automotives company is catering
to engines, transmission and chassis divisions. Its industrial division, which contributes 31%
to overall sales, caters to ~17,000 customers, with top 10 customers contributing ~16% of
automotive sales. Customers from around 60 varied industrial sectors rely on rolling and
plain bearings, linear guides and direct drives from INA and FAG brands. With a product
range consisting of around 40,000 catalogue products as well as numerous special designs,
the Schaeffler Group has the widest product range in the sector.

Miscellaneous
Chart 11: CY12: Sales by region
CY12
Asia/Pacific
23% Europe
31%
Germany
26% North America
South America 15%
5%
Source: Schaeffler Group, Edelweiss research
Chart 12: Schaeffler’s sales break up (2012)
CY12
Industrial
31%
Automotive
69%
Source: Schaeffler Group, Edelweiss research
Around 6,000 engineers work at its 40 R&D facilities. The group owns the rights to more
than 18,500 patents & patent applications and more than 1,850 inventions are filed for
patent applications every year. R&D expenses surged 19.8% in CY12 to EUR593mn (CY11:
Parent’s R&D expenses grew EUR495mn) or 5.3% of revenue (CY11: 4.6%). The automotive division spent EUR429mn
19.8% to EUR593mn in CY12 and (CY11: EUR 361 m) or 5.6% of revenue (CY11: 5.0%) in CY12 and the industrial division
contributed 5.3% to sales. Going incurred R&D expenses of EUR164mn (CY11: EUR134mn) or 4.8% of revenue (CY11: 3.9%).
forward, management intends to
maintain this at 5% of global
sales

FAG Bearings
Chart 13: Innovation: A key success factor

Number of patent registrations
2,000
1,700
1,400
(Nos.)
1,100
800
500
2007 2008 2009 2010 2011 2012
Source: Schaeffler group, Edelweiss research
Globally, the company has been generating above industry average profitability and revenue
growth and targets to maintain the same led by the following:
• Strong market position in attractive markets.

• Increasing content per vehicle due to innovative product offering driving future trends
(downsizing, fuel efficiency, emission control, improved security, increased comfort).
• Successful product launches of recent years are getting into high volume production.
• Increasing market share in high growth markets such as China, India and Brazil.
• Continued R&D expense at ~5% of sales.

Miscellaneous
Financial Outlook
Strong outperformance with industry leading margin
Historically, FAG has outpaced peers like SKF, NRB and Timken in terms of sales growth
across the years, owing to extensive exposure to the high growth PV industry. This is
alongside industry leading margins. Low-margin traded goods account for ~32% of revenue,
which have increased from CY07. Going ahead, with manufacturing substituting the traded
industrial sales over a long time, we expect the company to continue to post strong industry
leading margin. We have assumed EBITDA margin to move from 12.8% to 14.9% over CY13-
15E, still lower than historic 17% OPM.
Auto revenue to post 19% CAGR over CY13-15E

With sizeable exposure to four wheelers (~74% of auto OEM bearings revenue), we expect
FAG to post 15% CAGR in OEM sales over CY13-15E led by improving rural demand and
aggressive product launches by OEMs. Over the next 18 months, ~16-17 new product
launches are expected across OEMs. As a result, we expect FAG’s auto OEM bearings (23%
of overall sales) revenue to grow 12% in CY14E and 19% in CY15E.
Strong exposure to passenger FAG derives ~34% of automotive revenue from the auto aftermarket segment (12% of
vehicles and commercial vehicles overall sales). With past OEM cycle driving sales, we expect 25% CAGR in auto replacement
at 44% and 30%, respectively, of sales over CY13-15E. Also, wide distribution network (more than 200 distributors) and
OEM revenue to drive strong preference for organised players will drive sales in this segment. As a result, we expect auto
19% sales CAGR bearings (OEM + replacement) segment revenue to grow 20% in CY14E and 19% in CY15E.
Chart 14: Auto bearings on an uptick

8,700 40.0
7,400 30.8
6,100 21.6
(INR mn)
(%)
4,800 12.4
3,500 3.2
2,200 (6.0)
Manufacturing domestic auto sales % growth

Manufacturing trajectory better than traded

The industrial bearings segment is expected to grow in H2CY14 riding the anticipated revival
in the manufacturing sector (IIP) in CY14. FAG derives ~32% of revenue from the traded
industrial sector. Also, it derives 18% of overall sales from the manufactured industrial
segment. Improvement in key segments such as railways, power and mining sectors will also
drive demand. Also, the company’s Savli plant, commissioned in October 2012, in

FAG Bearings
conjunction with further capex expected over the next three years will drive sales growth
led by localisation of imported traded bearings.
We anticipate the company to post strong growth riding its massive capacity expansion of
INR3.5bn (85% expansion of CY10 gross block). Further, capex of INR2bn (~28% expansion of
CY13 gross block) is planned in the medium term. As a result, overall gross block will
Strong capex to drive
increase 2.1x over CY10-15E. The Savli plant has a capacity of 36mn units per year of ball
manufacturing sales at 21%
bearings and 12,000 pieces per year of large scale bearings. We have assumed INR 5.7bn of
CAGR versus 16% CAGR in traded
incremental manufacturing sales over CY11-15 over gross block addition of INR5.5bn. The
sales over CY13-15E
company has historically generated core fixed asset turn at 1.8x, while we have assumed
1.02x. We have assumed 21% CAGR in manufacturing sales over CY13-15 versus 15% CAGR
in past five years. Also, with growing manufacturing, the traded sales trajectory will be
lower at 16% CAGR over CY13-15E.
Chart 15: 21% CAGR in manufactured vs 15% CAGR in traded sales over CY13-15E
24,000
19,200
(INR mn)
14,400
9,600
4,800
0
CY08 CY09 CY10 CY11 CY12 CY13E CY14E CY15E
Manufactured Traded
Higher operating leverage, lower traded sales to boost margin

We believe EBITDA margin is likely to surge on account of increasing capacity utilisation and
gradual shifting from trading to manufacturing in sales. With better operating leverage and
lower traded sales (import substitution) we expect improvement in gross margin and
operating margin by 67bps and 203bps to 37.9% and 14.9%, respectively, over CY13-15E.
Hence, we expect 28% CAGR in operating profit over CY13-15E. The margins we have
assumed are still lower than historic average EBITDA margin of 17% over past five years.

Miscellaneous
Chart 16 : Margin set to improve
3,500 25.0
2,900 22.0
Operating profit to post 28%
CAGR over CY13-15E assuming 2,300 19.0
(INR mn)
OPM at 14.9% in CY15E —lower
(%)
than historic average OPM of
1,700 16.0
17%
1,100 13.0
500 10.0
CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15
EBITDA EBITDA margin (%)

Chart 17: Robust PAT growth trajectory

2,548
2,162
1,775
(INR mn)
1,389
1,002
616
CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14E CY15E
We expect FAG to post PAT CAGR of 31% over CY13-15E (CY07-15 CAGR 15%) primarily led
by manufacturing upsurge and margin uptick with operating leverage.
Higher margin, asset turnover to boost return ratios

While the overall core gross fixed asset turn has dipped to 1.5x (from historic average of
1.8x in past three years), we expect the asset turn to improve to 1.7x over the next two
years despite further capital outlay over the next two-three years led by ramp up in
production with demand uptick and gradual shift in mix in favour of manufacturing sales.
This will enhance operating margin. Ergo, with increase in capacity utilisation, we expect
RoE and core RoCE to jump from 13.1% and 21.8% in CY13 to 17.1% and 34.8% in CY15E,
respectively.

FAG Bearings
Chart 18: RoE and Core RoCE (%) – to trend up with improving margins
71.0
58.8
46.6
(%)
34.4
22.2
10.0
CY09 CY10 CY11 CY12 CY13 CY14E CY15E
RoE (%) Core RoCE (%)

Strong cash reserves

FAG is debt free with INR3.2bn in cash (INR195/share) as on CY13, ~12% of market cap. This
With improving asset turn we is including the loans given to group (associate) companies. The company has been
expect RoE to jump 400bps to generating strong operating cash flow over the years. Working capital has been low. It
17.1% and core RoCE to catapult incurred significant capex (INR3.5bn) over the past three years. Further, it will incur capex of
1300bps to 34.8%; historic INR2bn over CY13-15E. Despite this, we expect free cash flow over the next two years to be
average of 23.2% and 47.9% INR4.4bn (versus INR3.4bn in past six years). Hence, we expect the company’s net cash to
respectively stand augmented by 1.7x to INR339/share in CY15 (~22% of current market cap). We
expect net cash per share at INR245 (16% of current market cap) and INR339 (22% of current
market cap) for CY14E and CY15E, respectively, from INR195per share currently.
Chart 19: Strong cash flow generation

4,200
3,200
With strong free cash flow we

2,200
(INR mn)
expect net cash per share to

stand augmented by 1.7x to
1,200
INR339/share in CY15E (22% of
current market cap)
200
(800)
CY09 CY10 CY11 CY12 CY13E CY14E CY15E
Operating cash flow Free cash flow


Miscellaneous
Financial Statements
Key assumptions Income statement (INR mn)
Year to December CY12 CY13 CY14E CY15E Year to December CY12 CY13 CY14E CY15E
Macro Net revenues 14,467 14,300 16,764 20,343
GDP(Y-o-Y %) 5.0 4.8 5.4 6.3 Raw material costs 9,076 8,971 10,431 12,626
Inflation (Avg) 7.4 6.2 5.5 6.0
Gross profit 5,391 5,329 6,333 7,717
Repo rate (exit rate) 7.5 8.0 7.5 7.0
Employee expenses 1,129 1,191 1,380 1,586
USD/INR (Avg) 55 62 60 58
Other expenses 2,058 2,302 2,634 3,107
Industry growth assumptions (%)
Auto OEM (2W) volume growth 2.1 6.0 8.0 10.0 Operating expenses 3,187 3,493 4,014 4,693
Auto OEM PV volume growth 2.7 (5.5) 6.0 12.0 Total expenditure 12,262 12,464 14,445 17,319
Auto CV industry volume growth (10.5) (19.0) 11.0 23.0 EBITDA 2,204 1,836 2,319 3,024
Company growth assumptions (%) Depreciation & amortisation 303 433 456 497
Manufactured sales (%) EBIT 1,901 1,403 1,863 2,527
Auto 2W OEM volume growth 2.1 6.0 8.0 10.0
Interest expense 13 8 0 0
Auto PV OEM volume growth 2.7 (4.5) 7.0 13.0
Other income 446 459 512 607
Auto CV OEM volume growth (10.5) (19.0) 11.0 23.0
Auto aftermarket sales growth (17.3) 25.3 31.5 18.8 Profit before tax 2335 1854 2375 3134
Industrial sales growth 10.2 (18.0) 10.0 22.0 Provision for tax 743 636 784 1034
Export revenue growth 28.1 15.0 15.0 15.0 Core profit 1,592 1,218 1,591 2,100
Traded sales (%) Extraordinary/ Prior period items - - - -
Industrial sales growth 11.1 (10.0) 10.0 10.0 Profit after tax 1,592 1,218 1,591 2,100
Revenue mix (% of gross sales) Equity shares outstanding (mn) 16.6 16.6 16.6 16.6
Manufactured 68.2 70.9 72.0 72.4
Core EPS (INR) basic 95.8 73.3 95.8 126.3
Traded 31.8 29.1 28.0 27.6
Diluted shares (mn) 16.6 16.6 16.6 16.6
Gross margin
Manufacturing gross margin (%) 49.2 49.0 49.0 49.0 EPS (INR) diluted 95.8 73.3 95.8 126.3
Traded gross margin (%) 15.1 12.5 12.5 12.5 CEPS 77.6 47.3 68.3 96.5
Cost assumptions DPS 5.0 6.0 8.0 11.0
Raw mat. cost as % net sales 62.7 62.7 62.2 62.1 Dividend payout (%) 5.2 8.2 8.4 8.7
Employee cost as % of net sales 7.8 8.7 8.5 8.4
Administrative exp as % of net sales 14.2 15.9 15.7 15.6
Common size metrics (% net revenues)
Gross margin 37.3 37.3 37.8 37.9
Operating expenses 22.0 24.4 23.9 23.1
EBITDA margins 15.2 12.8 13.8 14.9
EBIT margin 13.1 9.8 11.1 12.4
Interest 0.1 0.1 0.0 0.0
Net profit margin 11.0 8.5 9.5 10.3
Growth metrics (%)

Revenues 10.6 (1.1) 17.2 21.3
EBITDA (13.2) (16.7) 26.3 30.4
PBT (10.5) (20.6) 28.1 31.9
Core Net profit (9.5) (23.5) 30.6 31.9
Core EPS (9.5) (23.5) 30.6 31.9

FAG Bearings
Balance sheet (INR mn) Cash flow metrics

As on 31st December CY12 CY13 CY14E CY15E Year to December CY12 CY13 CY14E CY15E
Share capital 166 166 166 166 Operating cash flow 1,371 2,050 3,023 3,454
Reserves & surplus 8,629 9,709 11,145 13,031 Financing cash flow (206) (117) (156) (214)
Shareholder equity 8,795 9,876 11,312 13,198 Investing cash flow (1,721) (640) (1,100) (900)
Deferred tax liability/asset 64 174 - - Net cash flow (556) 1,294 1,767 2,340
Sources of funds 8,859 10,050 11,312 13,198 Capex (1,407) (641) (1,100) (900)
Gross fixed assets 5,953 7,089 7,994 9,029 Dividends paid (193) (117) (156) (214)
Accumulated depreciation 3,171 3,604 4,059 4,556
Tangible assets 2,782 3,485 3,935 4,473 Profitability ratios
Intangible assets 9 10 10 10 Year to December CY12 CY13 CY14E CY15E
CWIP (incl. intangible) 1,136 640 835 700 Core ROACE (%) 36.0 21.8 26.8 34.8
Total net fixed assets 3,927 4,135 4,780 5,183 ROAE (%) 19.8 13.1 15.0 17.1
Non current investments 44 44 44 44 ROA (%) 19.7 12.9 14.9 17.1
Investments 44 44 44 44 Current ratio 2.1 2.1 1.9 1.8
Cash and cash equivalents 1,948 2,346 3,395 4,880 Quick ratio 1.6 1.6 1.4 1.3
Inventories 1,422 1,706 1,860 2,053 Cash ratio 0.8 0.7 1.0 1.3
Sundry debtors 2,547 2,906 2,326 2,629 Receivable turnover (x) 6.2 5.2 6.4 8.2
Loans and advances 1,510 2,112 2,112 2,112 Inventory turnover (x) 6.0 5.7 5.8 6.5
Other assets 39 65 65 65 Payables turnover (x) 5.1 4.3 4.3 4.8
Total current assets (ex cash) 5,518 6,790 6,364 6,859 Receivables (days) 59 70 57 44
Trade payable 1,786 2,405 2,392 2,843 Inventory (days) 61 64 62 57
Other current liabilities & prov. 791 859 878 926 Payables (days) 71 85 84 76
Total current liabilities & prov. 2,577 3,264 3,270 3,769 Cash conversion cycle (days) 49 48 35 25
Net current assets (ex cash) 2,941 3,525 3,093 3,091
Application of funds 8,860 10,050 11,312 13,198 Operating ratios (x)
Book value per share (INR) 529 594 681 794 Year to December CY12 CY13 CY14E CY15E
Total asset turnover 1.8 1.5 1.6 1.7
Free cash flow (INR mn) Fixed asset turnover 2.7 2.2 2.2 2.4
Year to December CY12 CY13 CY14E CY15E Equity turnover 1.8 1.5 1.6 1.7
Net profit 1,592 1,218 1,591 2,100 Core Fixed asset turnover 1.8 1.5 1.5 1.7
Add: Depreciation 303 433 456 497
Add: Int & other non-cash items (150) 355 544 855 Valuation parameters
Gross cash flow 1,744 2,006 2,591 3,451 Year to December CY12 CY13 CY14E CY15E
Less: Changes in working cap. 374 (44) (432) (3) Diluted EPS (INR) 95.8 73.3 95.8 126.3
Operating cash flow 1,371 2,050 3,023 3,454 Y-o-Y growth (%) (9.5) (23.5) 30.6 31.9
Less: Capex 1,407 640 1,100 900 CEPS (INR) 77.6 47.3 68.3 96.5
Free cash flow (37) 1,410 1,923 2,554 Diluted P/E (x) 16.3 21.3 16.3 12.3
P/BV (x) 2.9 2.6 2.3 2.0
EV/Sales (x) 1.6 1.5 1.2 0.9
EV/EBITDA (x) 10.2 11.7 8.8 6.3
Dividend yield(%) 0.3 0.4 0.5 0.7
Peer comparison valuation

Companies Mcap P/E (x) ROE (%) Core ROCE (%) FCF/Share
(INR bn) CY13 CY14E CY15E CY13 CY14E CY15E CY13 CY14E CY15E CY13 CY14E CY15E
SKF 33.5 19.1 15.6 12.0 14.3 15.7 17.9 31.5 38.3 52.4 18 35 45
FAG 25.9 21.3 16.3 12.3 12.8 13.8 14.9 21.8 26.8 34.8 85 116 154

Miscellaneous
Additional Data
Directors Data
Avinash Gandhi Chairman R Sampath Kumar Director
Rajendra Anandpara Managing Director Kamlesh Tapadar Alternate Director
Bruno Krauss Director Yezad Kapadia Alternate Director
Frank Huber Director Raj Sarraf Company Secretary
Bernhard Steinruecke Director Robert Schullan Additional Director
Moreshwar Garde Director
Auditors - BSR & Co.

*as per last available data
Holding Top -10

Perc. Holding Perc. Holding
HDFC Trustee Co Ltd - HDFC Multiple Yield Fund - Plan 2005 4.41 IDFC Equity Oppertunity - Series I 2.81
Acacia Partners LP 3.63 ICICI Prundential Life Insurance Company Ltd 1.9
Sundaram mutual Fund A/c Sundaram Monthly Incom Plan - Aggressive
3.51Plan Shree Capital Services Ltd 1.66
Acacia Institutional Partners LP 3.12 Franklin India Smaller Companies Fund 1.30
SBI Contra Fund 3.07 New India Assurance Company Ltd 1.29
Bulk Deals
Date Acquirer / Seller B/S Qty Traded Price
5-Jul-12 ACACIA PARTNERS L.P S 223,500 1,505
5-Jul-12 ACACIA BANYAN PARTNERS P 223,500 1,505
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
No Data Available

INITIATING COVERAGE
SKF INDIA
Geared for growth
EDELWEISS RATINGS
SKF India (SKF) is leading bearings company with overall industry and ball
Absolute Rating BUY
bearing market shares at ~28% and 45%, respectively. By virtue of being
Investment Characteristics Growth
market leader, company will be a strong beneficiary of the cyclical uptick
in auto and industrials segments. High exposure to two-wheelers (58% of
auto OEM sales) will drive SKF’s revenue. It is also well placed to MARKET DATA (R: SKFB .BO, B: SKF IN)
capitalise on structural opportunity of India becoming one of the major CMP : INR 642
manufacturing hubs of global OEMs. A strong distribution network (300 Target Price : INR 795
plus distributors, 20,000 retailers) renders after-market segment at ~47% 52-week range (INR) : 700 / 432
of revenues, insulating company from cyclical downturns. Expected Share in issue (mn) : 52.7
economic revival and higher capacity utilisation (~65% now) will be M cap (INR bn/USD mn) : 34 / 543
catalysts to strong sales. We initiate coverage with ‘BUY’. Avg. Daily Vol. BSE/NSE (‘000) : 28.5
Well-diversified business model insulates from cyclicality SHARE HOLDING PATTERN (%)
SKF has well-diversified segments and customer models, with auto and industrial Current Q1FY14 Q4FY13
segments at ~45% and 49% of sales, respectively, and no customer contributing more Promoters * 53.6 53.6 53.6
than 5% to sales. Diversification arms the company to gain from a cyclical uptick in MF's, FI's & BKs 17.6 15.8 15.3
auto and industrial OEMs. Also, SKF derives significant revenue (~47%) from the after- FII's 14.8 16.4 16.9
market segment, which reduces revenue cyclicality during economic downturns. Others 14.0 14.3 14.3
* Promoters pledged shares : NIL
Indirect beneficiary of capacity expansion in industrial segment
The company imports major chunk of industrial bearings from SKF AB and partly PRICE PERFORMANCE (%)
sources them from SKF Technologies (parent’s wholly-owned subsidiary). Ramping up Stock over
Sensex Stock
of capacity by SKF Technologies will yield localisation, reduction in lead time and cost Sensex
benefits. We expect the SKF Group to pass on some cost benefits to gain market share. 1 month (2.8) 0.5 3.3
Rising localisation will catapult SKF’s trading sales to 19% CAGR over CY13-15E. Also, 3 months (1.9) 3.6 5.4
the sourcing model of semi-finished goods results in asset-light business model. 12 months 4.9 15.7 10.8
Outlook and valuations: On growth path; initiate with ‘BUY’

Uptick in manufacturing and traded sales along with improving capacity utilisation will
be catalysts to SKF’s earnings catapulting 23% and 30% in CY14E and CY15E,
respectively. The stock is trading at 15.6x and 12.0x CY14E and CY15E EPS,
respectively, at a discount to historical mean valuation of 15x. We initiate coverage
with ’BUY’ and TP of INR795 (15x CY15E EPS), implying 26% upside from current level.
Financials (Click on image
to view video)
Year to December CY12 CY13E CY14E CY15E
Net revenues (INR mn) 22,276 22,268 25,807 31,000
Shradha Sheth
EBITDA (INR mn) 2,584 2,499 2,958 3,788 +91 22 6623 3308
Core profit (INR mn) 1,901 1,752 2,151 2,795 shradha.sheth@edelweissfin.com
Diluted shares (mn) 53 53 53 53
Manoj Bahety, CFA
EPS (INR) 36.0 30.3 40.8 53.0 +91 22 6623 3362
EV/EBITDA (x) 10.5 10.6 8.4 6.0
ROAE (%) 17.5 14.3 15.7 17.9 February 19, 2014

Bearings
Investment Rationale
Market leader with strong parentage ensures robust positioning
SKF is the market leader with ~28% and ~45% shares in the overall bearings industry and
ball bearings segment, respectively. Also, dominant position in the deep grove ball bearing
segment equips it to benefit from an uptick in the auto as well industrial segments. Parent,
SKF AB, is the world’s largest bearing maker with a turnover of ~EUR7bn as on CY12 and
In such challenging times, we global ball bearing market share of ~20%. Parent’s strong back up bolsters SKF’s technology
have been working very closely prowess. The company is drawing plans to emerge as a service solution player by
with customers to improve our introducing innovative products and solutions from the parent’s stable, rather than
share of business. As a result, discounting products to battle the downturn. New products contributed ~12% to overall
even if our customers’ sales have sales in CY12 and management‘s target is to increase this to ~20-25% over next 3 years.
declined, our decline has not been This, coupled with a formidable distribution network of more than 300 distributors and
very sharp. 20,000 retailers, will aid SKF capture larger pie of the market. FAG (~17% market share),
-Mr. Shishir Joshipura, Timken India (~8% market share) and NRB Bearing (~7% market share) are its key
Managing Director competitors.
Diversified model insulates from cyclicality

SKF has developed a well-diversified business model, suffusing it with resilience to
withstand headwinds of cyclical downturn in any particular segment as well as customers.
With domestic capacities substantially catering to two-wheeler and passenger car demand,
the company has a relatively de-risked revenue profile, both in industrial and automobile
segments. It derives around 45% revenue from the domestic automotive segment, within
which 69% contribution is from OEMs and 31% from replacement. Around 49% of revenue
comes from the industrial segment, within which OEMs contribute 33% and replacement
Market leader in bearings 67%; exports contribute the balance 6%. This diversification equips the company to gain
industry with 28% market share; from a cyclical uptick in auto and industrial OEMs. Also, SKF derives significant portion
enjoys strong product positioning (~47%) of revenue from the after-market segment, which reduces cyclicality in revenue,
in ball bearings with 45% market especially during economic downturns. Moreover, no single customer contributes more
share than ~5% to revenue, which insulates it further from cut-back in orders from any particular
segment.
Enhanced capacity utilisation to drive growth

Diversified revenue stream with
45% of sales from automotives, Riding strong product demand, SKF had embarked on an aggressive capex of INR2.3bn over
49% from industrials, 6% from CY10-12 across business segments to augment capacity from 132mn in CY09 to 181mn in
exports; overall replacement at CY11.
47% insulates from cyclicality

SKF India
Chart 1: Improving asset turn

12,200 4.0
One clear dimension is that
everybody is worried about 10,800 3.2
improving their asset utilization,
which justifies our positioning
(INR mn)
9,400 2.4
-Shishir Joshipura,
(x)
Managing Director
8,000 1.6
6,600 0.8
5,200 0.0
Gross block Asset turn (x)
However, with drop in demand, SKF’s current capacity utilisation stands at 60-65%
compared to 75% and 80% over the past three and five years, respectively. Going forward,
with an improvement in two-wheeler sales (~58% of its OEM sales) and pent up demand in
other segments we expect 17% CAGR in manufacturing sales over CY13-15E versus 7% CAGR
in past five years.
Chart 2: Underutilised capacity

187,500 110.0
165,500 99.8
(Nos '000)
143,500 89.6
(%)
121,500 79.4
99,500 69.2
77,500 59.0
CY07 CY08 CY09 CY10 CY11
Installed capacity (in Nos' 000) Production (in Nos' 000)

Sales qty (in Nos' 000) Capacity utilization (%)

Bearings
With capacity utilisation at ~65% Chart 3: Manufacturing sales uptick

and expected uptick in its key 16,000 37.0
OEM segment – two-wheeler
accounts for 58% of its overall 13,800 28.4
auto OEM sales - we expect
manufacturing sales to log 17%
(INR mn)
11,600 19.8
CAGR over CY13-15E
(%)
9,400 11.2
7,200 2.6
5,000 (6.0)
Manufactured domestic auto sales % growth
Localisation of high-margin industrial segment to drive growth

On account of being ahead in
terms of capacity commissioning, The company does not manufacture industrial bearings, but majorly imports them from the
we expect traded sales to parent company and partially sources them from SKF Technologies (parent’s wholly-owned
increase at 19% CAGR over CY13- subsidiary), which started domestic manufacturing of industrial bearings in CY10 end. The
15E, led by rising industrial benefits of domestic sourcing will be significant as it will reduce lead time. We expect the
demand SKF Group to pass on some of the benefits to customers to gain market share.
The traded bearings segment’s (import + sourced from SKF Technologies; 43% of overall
revenue) sales posted 9% CAGR over past five years and averaged 15% gross margin.
Increasing localisation will boost the company’s sales. As a result, we have assumed 19%
CAGR over CY13-15 versus 17% CAGR expected for manufactured bearings segment over
the same period.
Chart 4: Traded sales to grow strongly led by localisation

15,500 43.0
13,500 31.6
11,500 20.2
(INR mn)
(%)
9,500 8.8
7,500 (2.6)
5,500 (14.0)
Traded bearings % growth


SKF India
SKF is well equipped to ride the strong benefits of increasing localisation led by new product
launches and healthy distribution network. Also, having established its base since March
2010, SKF Technologies has a lead over FAG, which commenced operations in October 2012.
Higher operating leverage to boost EBIDTA margin

With better operating leverage led by increasing capacity utilisation, we have estimated
EBITDA margin to improve 100bps over CY13-15 to 12.2%. Hence, we expect 23% CAGR in
operating profit over CY13-15E. Historically, SKF has generated an average EBITDA margin of
12.4% over the past six years.
Chart 5: EBITDA margin set to improve

20.0
17.4
14.8
(%)
12.2
9.6
7.0

Bearings
Parent’s support to sustain growth
Strengthening R&D to engineer innovation

SKF AB increased investment in R&D by 10% YoY and a number of first-time patents by 30%
in CY12. Bolstered by a strong global R&D network, the parent will considerably strengthen
innovation capabilities in Asia-Pacific to cater to customers in the region. SKF AB has opened
a Global Testing Center in Bengaluru to focus on technology and product development (it
has two centers in Asia—India and Shanghai). Also, it opened a solutions factory in Pune
which is a one-stop shop for all technology platforms—bearings & units, seals, mechatronics,
services and lubrication solutions. It has a total of 21 solutions factories worldwide.
Globally, SKF AB’s plan is to maintain a lead in patent applications by continuously

SKF India received the Gold innovating and investing in R&D. In CY12, the group’s R&D expenses grew 10% to
award for quality from Bajaj Auto USD237mn or 2.5 % of revenue (prior year: 2.2%). These investments have resulted in
— it has been supplying ‘Zero numerous innovations, laying the ground for new standards, products and solutions in the
Defect’ products since the past
bearing industry and also in other platforms e.g., preventive maintenance and automated
two years
lubrication systems. In 2012, SKF AB recorded 663 invention disclosures and successfully
applied for 421 first filing patent applications. In India, led by its R&D capability, SKF was
recognised by Maruti Suzuki India as the “preferred supplier towards local R&D capability
development.”
Investing to enhance Asia-Pacific footprint

SKF AB aims to further expand its local production network. Asia currently accounts for 30%
of the group’s production sites, 24% of net sales and 26% of employees. Asia Pacific is one of
the key regions where growth and sales will be highest for the group over the long term.
Investments of USD118mn have been earmarked over the next few years. Out of this, the
group invested around USD88mn in China last year for a new bearing and truck hub factory.
Focusing on capital expenditure on growth regions such as China and India is part of the SKF
AB’s strategy to protect its competitive edge and leading position in the market.
Some CV companies have
extended warranties to SKF AB has set the following financial targets at the group level over the longer term:
4,00,000kms from 30,000kms
earlier. SKF has the technology to • 15% operating margin.
provide such enhancements as
European CV providers usually • 8% annual sales growth in local currencies.
provide warranty for • Having attained average RoCE of 21% in past seven years, the parent has set target of
16,00,000kms 27% RoCE.
Strong product pipeline to spur market share

SKF is taking concrete steps to venture into value-added products, which will not only
increase visibility and drive revenue, but also help maintain and improve margin going
forward. New products contributed 12-13% to the company’s revenue in CY13 and it is
targeting to increase the same to 20% by FY16. By combining over 100 years of engineering
knowledge, SKF AB and SKF India are developing innovative products. Some of the
significant product developments in the past two years include:

SKF India
New SKF low-friction seal

It reduces friction compared to conventional seals and reduces vehicle CO2 emission. It has
extended life and less oil leakage, leading to waste reduction.
Fig. 1: Low-friction seal
New SKF low-weight hub bearing units

Primarily used in automotive wheel ends (in light commercial vehicles and premium cars), it
has low weight which helps reduce fuel consumption.
Contribution of new value-added
products expected to increase Fig. 2: Low-weight hub bearing units
from 12-13% currently to ~20%
of sales by CY15E
New SKF nautilus range extension

This is for the wind energy requirements specifically designed to support main shaft in wind
turbines between 1.5 to 6MW. The range increases reliability, reduces weight and costs.
Fig. 3: Nautilus range extension
New sealed deep groove Ball Bearing

It reduces frictional losses and is designed for light to normal load applications and enables
longer bearing service life. It is suitable for applications ranging from electric motors and
two-wheelers to industrial conveyors and water pumps.
Fig. 4: Sealed deep groove Ball Bearing
Source: Company

Bearings
Upgraded self explorer self-aligning roller bearings

The roller bearings here are upgraded with better wear resistance. This was done through a
new heat treatment that substantially improves hardness of the bearing steel without
affecting toughness.
Fig. 5: Self-aligning roller bearings
Source: Company
SKF AB has a technical centre in Bengaluru which employs 200 plus engineers and has a
dedicated lubrication center and product investigation center to investigate field areas and
a mechatronics lab to develop sensor bearings and bearings for medical equipment.

SKF India
Valuation
Riding robust demand for auto and industrial bearings, we expect SKF’s earnings to surge 23%
and 30% in CY14E and CY15E, respectively, post (-8%) performance in CY13E. Over the long
term, we anticipate the company to be a strong beneficiary of localisation in industrial
segment with an edge over competition by virtue of having a plant in place in CY10. SKF’s cash
flow management in a weak macro environment has been commendable and we believe this
could improve in the near future with the potential tapering of capex. We estimate the
company to generate free cash flow of INR5.15bn over CY13-15 and it will augment CY12 net
Stock to trade at mid band of its cash/share by 1.88x to INR197 in CY15E (31% of current market cap). Further, the company’s
historic valuation at 15x CY15E EBITDA margin is likely to expand led by new value-added products and better operating
EPS on increasing capacity leverage. It has a strong earnings growth trajectory, debt-free balance sheet, robust cash flows
utilisation in manufacturing with healthy average RoE and core RoCE of 20% and 42%, respectively.
sales, strong uptick in trading
sales and earnings CAGR of 26% The stock is trading at a P/E of 15.6x and 12.0x CY14E and CY15E EPS, respectively which is
at a discount to its historic mean valuations. Anchored by its strong brand, healthy
distribution network and global parentage we initiate coverage with ‘BUY’ recommendation
and target price of INR795 based on 15x CY15E EPS. This is in line with its historical mean
valuation (past five years’ peak multiple—20x).
Table 1: Peer comparison

Companies Currency Mcap Core EPS Growth (%) P/E (x) ROE (%)
(INR bn) CY13/FY14E CY14/FY15E CY15/FY16E CY13/FY14E CY14/FY15E CY15/FY16E CY13/FY14E CY14/FY15E CY15/FY16E
Domestic Players
SKF INR 33.5 (7.8) 22.7 29.9 19.1 15.6 12.0 14.3 15.7 17.9
FAG INR 25.9 (23.5) 30.6 31.9 21.3 16.3 12.3 12.8 13.8 14.9
NRB* INR 4.8 (17.9) 37.5 20.0 9.0 6.5 5.5 21.9 17.9 22.0
Global Players*
Timken USD 361 (33.7) 19.4 22.0 19.3 16.2 13.3 14.1 21.4 27.7
SKF AB SEK 689 (24.4) 47.8 17.8 20.6 13.9 11.8 4.4 24.8 25.9
NSK JPY 37829 112.4 35.5 12.8 18.2 13.4 11.9 10.9 12.1 11.9
Note: *NRB and Global players estimates are as per bloomberg
Chart 6: One-year forward P/E

900
20x
720 17x
15x
540
12x
(INR)
360 10x
180
0
Aug-04
Aug-05
Aug-06
Aug-07
Aug-08
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Feb-04
Feb-05
Feb-06
Feb-07
Feb-08
Feb-09
Feb-10
Feb-11
Feb-12
Feb-13
Feb-14

Bearings
Key Risks
Delay in recovery in key segments
Slowdown in two-wheeler sales over and above the current slowdown in commercial
vehicles and cars can impact our sales growth projections since two-wheelers constitute
~58% of SKF’s auto OEM revenues.
Rising competition from Japanese players

International players like NSK, Nachi and Koyo are setting up base in India. This will heighten
competition in the auto bearings industry over the long term.
Forex fluctuation
SKF buys 40% of traded goods from group company, SKF GmbH, Germany. As a result, INR
depreciation against EUR may negatively impact margin on these EUR-denominated
imports. Overall imports constitute 35% of net sales. This also includes currency headwinds
on ~20% of raw material costs (~5.5% of net sales) which are imported. Netting exports,
which are 6% of sales, SKF’s net imports are at 29% of sales.
Reducing aftermarket
Better product quality, improved road infrastructure and prohibition on vehicle overloading
could gradually impact SKF’s aftermarket revenue.
Royalty rate increase

Currently, royalty, trademark and service fees as a percentage of overall sales are 2% and
4%, respectively, as a percentage of manufactured sales. Any increase in the same could
pose a risk.
Delay in ramping up Ahmedabad facility

Execution delay in ramping up SKF Technologies’ Ahmedabad plant could impact our growth
as well as earnings estimates.

SKF India
Company Description
Fig. 6: Evolution of SKF India
1997
Began world class
up-gradation of
Pune plant with
an investment of
INR1300mn;
1995 several channels
1989 Company started of deep grove ball
1923 Launched a exports to US, bearings (DGBB)
2002
Began state-of- the Italy, France and and taper
Established the 2011
trading art factory Germany roller bearings
SKF Center for Two new bearing
operations for SDGBB in (TRB) were
learning channels at the
in Calcutta Bangalore upgraded Bengaluru plant
1961 1965 1987 1999 2006 2010

'Associated Production Name of company SKF Bearings India SKF India received SKF inaugurated a
Bearing began in the changed to SKF signed an Dun & Bradstreet new factory in
Company.' first factory Bearing India; agreement with American Express Haridwar to service
was at At its new Telco to supply hub Corporate Award the two-wheeler and
incorporated Chinchwad, manufacturing bearings for its for the Top Indian replacement
Pune unit at latest model Tata Company in the market; Solution
Bommasandra, Indica; SKF Bearings Bearings Sector. factory at Pune to
company has a launched an offer value-added
technical electronic machine solutions to our
collaboration with reliability customers; sourcing
Akteibolaget SKF inspection system domestically large
called `Marlin', industrial bearings
which can monitor 2004 for industrial
the condition of SKF Application business
bearings in Development
industrial Center was
processes. inaugurated
2012
SKF launches the
SKF low friction hub
Bearing Unit, an
energy efficient
wheel end for cars;
installation of two
new product
channels in Pune
Source: Company

Bearings
SKF India
SKF is part of Sweden’s AB SKF Group, a leading global supplier of bearings with revenue of
~EUR7bn (as of CY12). In India, the company’s business spans across rolling bearings, seals,
mechatronics, services and lubrication systems. Within bearings, the company caters to
automobile OEM bearings, automobile aftermarket bearings, industrial OEM bearings,
industrial aftermarket bearings and exports. It has a well-diversified client base with no
client contributing more than 5% to revenue. SKF has a technology licence agreement with
parent AB SKF and pays royalty, trademark and service fees as a percentage of overall sales
at 2% and 4% as a percentage of manufactured sales.
While automotive bearings are manufactured, industrial bearings are majorly imported.
SKF is the No. 1 player in the Traded (industrial) goods contribute 43% to overall revenue, which are majorly imported
Indian bearings market with from overseas AB SKF group companies, a small part (less than 10%) is procured locally from
~28% market share and 45% SKF Technologies (unlisted entity owned by AB SKF). This helps SKF have a variable cost
share of ball bearings segment structure and asset-light business model. The company also exports to AB SKF group
companies, which constitutes 6% of sales.
In the automotive segment, the company caters to PVs, two-wheelers, CVs and tractors. SKF
derives 45% of its revenue from automotives, of which ~70% comes from OEMs and 30%
from replacement. In automotive OEMs, the company caters to almost all the big OEMs like
Tata Motors, Maruti, Mahindra & Mahindra, Hero, Bajaj, Toyota, Honda, Yamaha, Ford and
Bosch, among others. Balance 49% of revenue comes from industrial sales, which are traded
and the company earns distributor margins. Within industrial segment, OEMs contribute
~33% and 67% comes from replacement. In the industrial segment, SKF caters to almost all
industries like agriculture, mining, steel, construction, food & beverages, home appliances,
pulp & paper, solar and wind energy, fans, pumps, gearboxes etc. Its clientele includes Coal
India, Tata Steel, Lafarge, NTPC, Cummins, Suzlon, BHEL, GE, ABB, ONGC, ABB, ITC and
Unilever, among others.
SKF’s plants are located at Pune, Bengaluru and Haridwar with installed capacity in excess of
180mn units as on CY11 and running at ~60-65% utilisation. In terms of reach, the company
has pan-India presence with 300 distributors and 20,000 plus retailers. In India, last year, 60
new distributors and 2,000 new retailers joined SKF and a new kit centre was set up in Pune
in September 2012 to improve support for the Indian market.
The company also has a fellow subsidiary SKF Technologies which is a wholly owned
subsidiary of AB SKF, Sweden. While SKF addresses opportunities in the Indian bearings
market, SKF Technologies was set up to cater to global demand for industrial bearings in the
renewal energy segment. The latter derives more than 60% of revenue from exports and
domestic sales are routed via SKF. This entity now caters to off highway, earth moving,
defence equipments, etc. Having begun operations in March 2010, this entity reported
revenue and losses of INR1.9bn and INR520mn, respectively, in CY12. These losses may
continue on account of delays in capacity ramp up and long homologation periods (~3 years)
for industrial bearings.

SKF India
Chart 7: Business mix as on CY12: Highly diversified

Exports Auto OEM - Others
6% 4W 3%
13%
Industrial Auto OEM -

aftermarket 2W
33% 18%
Traded Manufactu
45% red
52%
Auto
Industrial aftermarket
OEM 14%
16%
Chart 2: Segment wise applications

Segment Product
Automotive 4 wheelers Wheel hub bearing units
Taper roller bearings
Small deep grove ball bearings
Seals
Repair kits
Automotive 2 wheelers Deep grove ball bearings
Seals
Industrial Spherical and cylindrical roller bearings
Angular contact bearings
Industrial aftermarket Service solutions
Preventive maintenance, condition monitoring,
decision support system and performance based
contracts
Chart 8: Sales growth of manufactured and traded bearings

18,000 43.0
15,500 31.6
(INR mn)
13,000 20.2
(%)
10,500 8.8
8,000 (2.6)
5,500 (14.0)
Manufactured bearings Traded bearings % growth % growth

Bearings
SKF AB (Global)
Sweden’s SKF Group, established in 1907, is a leading global supplier of bearings with
revenue of EUR7bn (as of CY12), 20% market share in ball bearings and 11.4% operating
margin. Its fundamental strength is the ability to continuously develop new technologies
and create products that offer competitive advantage to customers. This is based on
experience in over 40 industries with knowledge across SKF technology platforms—bearings
& units, seals, mechatronics, services and lubrication systems. The group does business
primarily through its three business areas—SKF Industrial Market, Strategic Industries; SKF
SKF AB (Sweden) is the leading Industrial Market, Regional Sales and Service and SKF Automotive.
global supplier in bearings
industry with revenues of All divisions use the full range of SKF’s technical platforms, but target diverse customer
EUR7bn (as of CY12), 20% market
segments. While the industrial division serves a wide range of OEM customers, the service
share and strong 11.4%
operating margin division serves industrial aftermarket and uses both hardware and software to improve
plant efficiency and also provides maintenance, consulting and monitoring.
SKF AB has around 140 manufacturing sites in 28 countries and is represented in over 130
countries through its own sales companies, over 15,000 distributor locations and 46,000
employees. The group’s investment in R&D has resulted in numerous innovations, forming
bases for new standards, products and solutions in the bearing industry and also in other
platforms e.g., preventive maintenance and automated lubrication systems. In 2012, SKF AB
recorded 663 (620) invention disclosures and successfully applied for 421 (325) first filing
patent applications, increasing the number of first time patents by 30%. The group’s R&D
expenditure was USD237 in CY12, corresponding to 2.5% of its annual sales and grew by
10% YoY.
Chart 9: CY12: Sales breakup by region
Asia/Pacific North America

24% 22%
Middle East and

Africa
3% Latin America
8%
Eastern Europe
5%
Sweden
3%
Western Europe
35%
Source: SKF Global
Europe is SKF’s major market contributing 44% to the group’s revenue, followed by APAC at
27% and North America and Latin America at 22% and 8% respectively. Markets outside of
Western Europe and North America contribute 43% to revenues, up from 22% in 2000.

SKF India
Chart 10: CY12: Sales break up by business divisions

SKF Industrial
Market,
Strategic
SKF Automotive
Industries
30%
29%
SKF Industrial
Market,
Regional Sales
and Service
41%
Source: SKF Global
The automotive division provides bearings and seals to manufacturers of trucks, buses, cars
and two wheelers, as well as home appliances, electric motors and power tools. Repairs and
services are provided through SKF’s vehicle service market. SKF Industrial, regional sales
(IMRSS) caters to metals, pulp & paper, mining & cement, food & beverage and marine
segments. SKF Industrial, Strategic Industries (IMSI) caters to Aerospace, renewable energy,
traditional energy, industrial drives, precision, railway and off-highway and lubrication
segments. The higher margin IMSI and IMRSS generate over 70% of total revenue compared
to 57% in 2000 (previously named Industrial and Service).
Chart 12: Innovation—A key success factor

450
Patents - number of first filings
380
310
(Nos.)
240
170
100
2006 2007 2008 2009 2010 2011 2012
Source: SKF Global
SKF has set the following financial targets at the group level: over a longer term
• 15% operating margin.
• 8% annual sales growth in local currencies.

• 27% RoCE.

Bearings
Financial Outlook
Automotive revenue to post 19% CAGR over CY13-15E
With sizeable exposure to two wheelers (~58% of auto OEM bearings revenue), we expect
SKF to register 14% CAGR in two wheeler OEM over CY13-15E riding improving rural
demand and aggressive product launches by OEMs. Over the next 12-18 months, ~15 new
product launches are anticipated across two wheeler OEMs. As a result, SKF’s auto OEM
bearings (31% of overall sales) segment is estimated to post 15% revenue CAGR over CY13-
15E.
Post a life of about four-five years, bearings need replacement. SKF derives ~31% of
automotive revenue from the auto after-market segment (14% of overall sales). With past
OEM cycle driving sales, we expect 28% CAGR in auto replacement sales over CY13-15E.
Also, a formidable distribution network of more than 300 distributors and 20,000 retailers
and preference for organised players will drive this segment’s sales. Hence, we expect SKF’s
Strong exposure to two-wheelers auto bearings (OEM + replacement) segment to post 19% revenue CAGR over CY13-15E.
at 58% of OEM revenues to drive
robust automotive sales of 19%
sales CAGR over CY13-15E Chart 12: Auto bearings on an uptick
16,000 37.0
13,800 28.4
(INR mn)
11,600 19.8
(%)
9,400 11.2
7,200 2.6
5,000 (6.0)
Manufactured domestic auto sales % growth

SKF India
Chart 13: Two-wheeler industry trending up on strong rural demand

20 28.2
16 18.8
12 9.4
(mn)
(%)
8 0.0
4 (9.4)
0 (18.8)
FY14E
FY15E
FY16E
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
2W % YoY
Table 3: New product launches by two-wheeler OEMs over next 1-2 years
Company Segment Model Timeline
Hero MotoCorp Scooter Dash FY15
Scooter Dare FY15
Scooter Zir FY16
Better rural demand and Motorcycle New variants/refreshes FY14-15
aggressive product launches to HMSI Motorcycle 100-125cc commuter bike FY14
drive OEM demand in 2W, a key Motorcycle CBR300 FY15
segment for SKF Scooter Activa FY15
Bajaj Auto Motorcycle 100-125 cc commuter bike FY14 end
. Bajaj-KTM Motorcycle Pulsar 400 FY15
Motorcycle RC Series FY15/16
Suzuki Motorcycle Inazuma- GV250. FY15
India Yamaha Motors Scooter Alpha FY15
TVS Motors Scooter Wego Based FY14
Motorcycle New Victor FY15
Table 4: Capex plans of players

Capex (INR mn) FY12 FY13 FY14E FY15E
Hero Motors 6,835 4,001 8,000 8,000
Bajaj Auto 3,000 3,000 3,000 3,000
Increased localisation to drive 19% CAGR in trading sales

The industrial bearings segment is expected to surge in H2CY14 with expected revival in the
manufacturing sector (IIP) in CY14. SKF derives ~49% of revenue from the industrial sector.
Based on increased localisation in industrial bearings we expect growth of 16% and 23% in
traded sales in CY14 and CY15, respectively, post a decline (-8%) in CY13E.
We also expect improvement in key segments such as railways, power and mining sectors to
drive demand for industrial bearings. Within key segments, the wind energy sector is yet to

Bearings
attract investments despite introduction of generation-based incentives due to

apprehensions on disbursal of incentives given the weak government finances. However,
increased sourcing from SKF Technologies’ plant for other industrial end markets is likely to
drive market share gains. Sourcing from SKF Technologies, which is currently less than 10%
for SKF India, is likely to increase to 20% over the next two to three years which should drive
strong growth over the same period.
The key to highlight is that the company majorly imports industrial bearings and partially
sources them from SKF Technologies. As the latter ramps up manufacturing of industrial
bearings, the benefits of domestic sourcing would be significant. We expect SKF group to
pass on some of the benefits to customers to gain market share. Consequently, we have
estimated 19% CAGR in trading sales over CY13-15E versus 9% CAGR in past five years.
Chart 14: Strong uptick expected in traded sales over CY13-15E

15,500 43.0
13,500 31.6
11,500 20.2
(INR mn)
(%)
9,500 8.8
Capacity uptick ahead of peers in
industrial division to drive
trading sales at 19% CAGR versus 7,500 (2.6)
17% CAGR in manufacturing sales
over CY13-15E 5,500 (14.0)
Traded bearings % growth

Uptick in auto industry to help maintain gross margin

SKF’s overall gross margin is 36%—manufacturing margin ~50% and traded margin ~17%.
The latter suppresses the overall margin as in the traded business the company earns only
distribution margin. Traded goods, which contribute 43% to overall sales, are mostly
imported from SKF AB’s group companies, while less than 10% is procured locally from SKF
Technologies. While ongoing localisation will lead to strong sales growth in traded sales, an
uptick in auto industry will lead to increase in manufacturing sales. Hence, we expect overall
gross margin to sustain at ~35.7% in CY15E versus 36% in CY13E.

SKF India
Chart 15: Gross margin to sustain at ~36%

36.4
35.7
35.0
(%)
34.3
33.6
32.9
OPMs to improve led by increasing capacity utilisation

SKF has generated an average EBITDA margin of 11.6% in past five years. With uptick in
manufactured sales and better operating leverage, we expect EBITDA margin to surge
100bps over CY13-15E to 12.2%.
With a capacity utilisation of
Chart 16: Operating margin to improve
~65%, company well placed for
OPM uptick led by increased 20.0
utilisation
17.4
14.8
(%)
12.2
9.6
7.0
Higher capacity utilisation, lower capex to boost cash flow

SKF’s balance sheet is cash rich with no debt as on June 2013. The company incurred
significant capex (INR2.4bn) over the past three years, with an average run rate of
INR770mn per year. This is expected to taper to INR1.6bn over CY13-15E, an average run
rate of INR500-600mn per year, which will be internally funded and drive positive operating
and free cash flow.
Having undertaken major capacity expansion to 180mn in CY11 from 132mn in CY09—the
current capacity utilisation stands at 60-65% compared to 75% and 80% over the past three

Bearings
and five years, respectively. Hence, increasing capacity utilisation and downward capex
trajectory will boost operating cash flows.
Chart 17: Capex on a downtrend

1,161
984
807
(INR mn) 629
452
275
Abundant cash flow

SKF was carrying cash of INR5.5bn (including the loan given to SKF Technologies of INR2.45
bn) making it INR105/share as on CY12, which is 16% of current market cap. This is including
for the loans given to the group (associate) company. It incurred significant capex
(INR2.4bn) over the past three years, which is expected to taper to INR1.6bn over CY13-15E,
driving positive operating and free cash flow. SKF has been generating strong operating cash
flows over the years—CY08-12 cumulative free cash flow stood at INR1.46bn. However, this
includes an impact of ~INR2.4bn inter corporate loan extended to SKF Technologies.
Excluding this, free cash flow stood at ~INR3.86bn. Working capital has been low. Moreover,
On strong free cash flow we expect SKF Technologies will pay first tranche of INR250mn towards loan repayment in CY14, which
net cash per share to stand will be completed over five years.
augmented by 1.88x to
INR197/share in CY15E (31% of Hence, SKF’s free cash flow is estimated at INR5.15bn over the next three years (versus
current market cap) INR3.86bn in past five years). We expect the company’s net cash to stand augmented by
1.88x over CY12-15E to INR197/share in CY15E (31% of current market cap). We expect net
cash per share at INR121 (19% of current market cap), INR156 (25% of current market cap)
and INR197 (31% of current market cap) for CY13E, CY14E and CY15E, respectively, from
INR105per share in CY12 (17% of current market cap).
Improving asset turnover to bolster core return ratios

Historically, SKF has generated core fixed asset turnover ratio of 1.5x and an average EBIT
margin of 10.6%; this dropped to 1.3x and 9.6%, respectively, in CY13. Going forward, with
improving average asset turn and EBIT margin to 1.5x plus and 10.7%, respectively, we
expect RoE and core RoCE to rebound from 14.3% and 31.4% in CY13E to 17.9% and 52.4%
in CY15E, respectively.

SKF India
Chart 18: Higher core fixed asset turns
CY15E
CY14E
CY13E
CY12
CY11
CY10
0.0 0.5 1.0 1.5 2.0

(x)
Chart 19: RoE and RoCE (%) – To trend up with better asset turn
64.0
53.4
42.8
(%)
32.2
21.6
11.0
Core RoCE RoE


Bearings
Key assumptions Income statement (INR mn)
Year to December CY12 CY13E CY14E CY15E Year to December CY12 CY13E CY14E CY15E
Macro Net revenues 22,276 22,268 25,807 31,000
GDP(Y-o-Y %) 5.0 4.8 5.4 6.3 Raw material costs 14,415 14,241 16,509 19,932
Inflation (Avg) 7.4 6.2 5.5 6.0 Gross profit 7,861 8,027 9,298 11,068
Repo rate (exit rate) 7.5 8.0 7.5 7.0 Employee expenses 1,694 1,724 1,976 2,261
USD/INR (Avg) 54.5 62.0 60.0 58.0 Other expenses 3,583 3,804 4,365 5,019
Industry growth assumptions (%) Operating expenses 5,277 5,528 6,340 7,280
Auto OEM (2W) volume growth 2.1 6.0 8.0 10.0 Total expenditure 19,692 19,768 22,849 27,213
Auto OEM (PV) volume growth 2.7 (5.5) 6.0 12.0 EBITDA 2,584 2,499 2,958 3,788
Auto CV industry volume growth (10.5) (19.0) 11.0 23.0 Depreciation & amortisation 436 451 463 485
Company growth assumptions (%) EBIT 2,148 2,048 2,495 3,303
Manufactured sales (%) Other income 683 567 715 868
Auto 2W OEM volume growth 2.1 7.0 9.0 11.0 Profit before tax 2,831 2,615 3,210 4,171
Auto PV OEM volume growth (5.5) 6.0 12.0 Provision for tax 931 863 1,059 1,376
Auto CV OEM volume growth (10.5) (19.0) 11.0 23.0 Core profit 1,901 1,752 2,151 2,795
Auto aftermarket sales growth (4.7) 16.3 30.8 24.7 Extraordinary/ Prior period items - (155) - -
Industrial sales growth (6.5) (7.0) 13.0 18.0 Profit after tax 1,901 1,598 2,151 2,795
Export revenue growth (35.6) 5.0 5.0 5.0 Equity shares outstanding (mn) 52.7 52.7 52.7 52.7
Traded sales (%) Core EPS (INR) basic 36.0 33.2 40.8 53.0
Industrial sales growth (11.6) (7.9) 16.0 23.0 Diluted shares (mn) 52.7 52.7 52.7 52.7
Revenue mix (% of gross sales) EPS (INR) diluted 36.0 30.3 40.8 53.0
Manufactured 56.9 59.7 59.7 58.7 CEPS 27.8 24.7 32.0 43.8
Traded 43.1 40.3 40.3 41.3 DPS 7.5 6.7 8.3 11.0
Gross margin Dividend payout (%) 20.8 20.2 20.2 20.8
Manufacturing gross margin (%) 49.7 50.5 50.5 50.5
Traded gross margin (%) 17.1 18.5 18.5 18.5 Common size metrics (% net revenues)
Cost assumptions Year to December CY12 CY13E CY14E CY15E
Raw mat. cost as % net sales 64.7 64.0 64.0 64.3 Gross margin 35.3 36.0 36.0 35.7
Employee cost as % of net sales 7.6 7.7 7.6 7.2 Operating expenses 23.7 24.8 24.6 23.5
Administrative exp as % of net sales 16.1 17.0 16.8 16.0 EBITDA margins 11.6 11.2 11.5 12.2
EBIT margin 9.6 9.2 9.7 10.7
Interest 0.0 0.0 0.0 0.0
Growth metrics (%)

Revenues (8.5) (0.0) 15.9 20.1
EBITDA (13.3) (3.3) 18.4 28.1
PBT (9.6) (7.6) 22.7 29.9
Core Net profit (8.5) (7.8) 22.7 29.9
Core EPS (8.5) (7.8) 22.7 29.9

SKF India
Balance sheet (INR mn) Profitability ratios

As on 31st December CY12 CY13E CY14E CY15E Year to December CY12 CY13E CY14E CY15E
Share capital 527 527 527 527 Core ROACE (%) 35.2 31.5 38.3 52.4
Reserves & surplus 11,026 12,365 14,007 16,123 ROAE (%) 17.5 14.3 15.7 17.9
Deferred tax liability/asset 84 - - - ROA (%) 17.5 14.3 15.7 17.9
Sources of funds 11,637 12,893 14,534 16,650 Current ratio 2.0 2.1 2.0 1.8
Gross fixed assets 9,422 10,022 10,522 11,022 Quick ratio 1.5 1.5 1.4 1.2
Accumulated depreciation 5,942 6,393 6,856 7,341 Cash ratio 0.7 0.9 1.2 1.4
Tangible assets 3,480 3,629 3,666 3,681 Receivable turnover (x) 6.4 6.7 7.4 8.3
Intangible assets 1 1 1 1 Inventory turnover (x) 5.5 5.6 6.1 6.6
CWIP (incl. intangible) 591 591 591 591 Payables turnover (x) 4.9 5.0 5.3 5.7
Total net fixed assets 4,072 4,221 4,258 4,273 Receivables (days) 57 54 49 44
Cash and cash equivalents 3,070 3,787 5,735 8,047 Inventory (days) 67 66 60 55
Inventories 2,486 2,630 2,780 3,245 Payables (days) 74 73 68 64
Sundry debtors 3,196 3,442 3,547 3,963 Cash conversion cycle (days) 49 47 41 35
Loans and advances 3,134 3,134 2,884 2,634
Other assets 43 43 43 43 Operating ratios (x)
Total current assets (ex cash) 8,859 9,249 9,254 9,884 Year to December CY12 CY13E CY14E CY15E
Trade payable 2,679 2,983 3,201 3,794 Total asset turnover 2.0 1.8 1.9 2.0
Other current liabilities & prov. 1,684 1,381 1,511 1,760 Fixed asset turnover 2.4 2.3 2.5 2.9
Equity turnover 2.1 1.8 1.9 2.0
Total current liabilities & prov. 4,363 4,364 4,713 5,553
Core Fixed asset turnover 1.3 1.3 1.4 1.6
Net current assets (ex cash) 4,496 4,885 4,541 4,331
Application of funds 11,637 12,893 14,534 16,650 Valuation parameters
Book value per share (INR) 219 245 276 316 Year to December CY12 CY13E CY14E CY15E
Diluted EPS (INR) 36.0 30.3 40.8 53.0
Free cash flow (INR mn) Y-o-Y growth (%) (8.5) (15.9) 34.6 29.9
Year to December CY12 CY13E CY14E CY15E CEPS (INR) 27.8 24.7 32.0 43.8
Net profit 1,901 1,752 2,151 2,795 Diluted P/E (x) 17.6 20.9 15.6 12.0
P/BV (x) 2.9 2.6 2.3 2.0
Add: Depreciation 436 451 463 485
EV/Sales (x) 1.2 1.2 1.0 0.7
Add: Int & other non-cash items (460) (271) (371) (360)
EV/EBITDA (x) 10.5 10.6 8.4 6.0
Gross cash flow 1,877 1,932 2,243 2,920 Dividend yield(%) 1.2 1.1 1.3 1.7
Less: Changes in working cap. (112) 389 (94) 39
Operating cash flow 1,989 1,543 2,336 2,881
Less: Capex 807 600 500 500
Free cash flow 1,182 943 1,836 2,381
1,182 937 1,830 2,372
Cash flow metrics
Operating cash flow 1,989 1,543 2,336 2,881
Financing cash flow (460) (413) (509) (679)
Investing cash flow (1,011) (600) (250) (250)
Net cash flow 519 529 1,577 1,952
Capex (807) (600) (500) (500)
Dividends paid (460) (413) (509) (679)
Peer comparison valuation

Companies Mcap P/E (x) ROE (%) Core ROCE (%) FCF/Share
(INR bn) CY13 CY14E CY15E CY13 CY14E CY15E CY13 CY14E CY15E CY13 CY14E CY15E
SKF 33.5 19.1 15.6 12.0 14.3 15.7 17.9 31.5 38.3 52.4 18 35 45
FAG 25.9 21.3 16.3 12.3 12.8 13.8 14.9 21.8 26.8 34.8 85 116 154

Bearings
Additional Data
Directors Data
Kamlesh C Mehra Chairman Pradeep Bhandari Company Secretary
Henrik Lange Director Shishir Joshipura Managing Director & CEO
Darius C Shroff Director Prasad R Menon Director
Tryggve Sthen Director David Bishop Alternate Director
Rakesh Makhija Director Prakash M Telang Alternate Director
Vartan Vartanian Director
Auditors - BSR & Associates

Holding Top -10

Perc. Holding Perc. Holding
Ruanne Cunniff & Goldfarb Inc A/c 5.72 Reliance Capital Trustee Co Ltd A/c Reliance Vision Fund 1.15
Carnegie Fonder AB A/c Carnegie Strategifond 3.32 Stichting Pensioenfonds ABP 1.06
UTI Master Share Unit Scheme 2.08 HDFC Trustee Company Ltd HDFC Equity Fund 1.83
SBI Magnum Taxgain Scheme 2.09 HDFC Trustee Company Ltd A/c HDFC Mid capopportunities Fund 1.50
New India Assurance Company Ltd 1.22
Bulk Deals
Date Acquirer / Seller B/S Qty Traded Price
5-Jul-12 ACACIA PARTNERS L.P S 370,600 626
5-Jul-12 ACACIA BANYAN PARTNERS P 370,600 626
Insider Trades
Reporting Date Acquirer / Seller B/S Qty Traded
21-Jan-14 HDFC Mid-Cap Opportunities Fund Buy 50,000
21-Jan-14 HDFC Prudence Fund Buy 68,000
13-Dec-13 Ruane Cunniff & Goldfarb Inc A/c ACACIA II Partners LP & Oth Sell 210,000
8-Mar-11 Ruanne Cunniff & Goldfarb Inc. & PACs Buy 153,000

COMPANY PROFILE
NRB BEARINGS
Needle sharp
NRB Bearings (NRB), the fifth largest organised bearings player in India EDELWEISS RATINGS
with ~7% revenue market share, is a dominant player (70% market share) Absolute Rating NOT RATED
in niche needle roller bearings. Given specialised application of needle Investment Characteristics NA
bearings (50% of NRB’s revenues) and small market size, competitive
intensity is low with INA (a Schaeffler Group company) being the other
MARKET DATA (R: NBEA.BO, B: NRBBR IN)
major competitor. Company manufactures customised bearings for
CMP : INR 37
leading domestic and global auto companies. Domestic OEMs and
Target Price : NA
exports continue to be key growth drivers. The stock is Not Rated.
52-week range (INR) : 46 / 26
OEMs: Major revenue contributor
OEMs account for a major 65% of NRB’s revenues as the company is equipped with Avg. Daily Vol. BSE/NSE (‘000) : 89.4
indigenous engineering capabilities. Within OEMs, ~70% of the company’s supplies are
to two-wheelers, three-wheelers and commercial vehicles. The aftermarket business
constitutes 14% of its sales. Some of its key customers include Hero MotoCorp, Bajaj
Auto, Maruti Suzuki and Renault Volvo. It works with many OEMs, directly and
Promoters * 62.5 62.8 62.8
indirectly, from the conceptualisation stage to providing anti-friction solutions.
MF's, FI's & BKs 1.2 1.2 1.2
FII's 19.0 19.0 18.7
Exports: A strong driver
Others 17.3 17.0 17.3
NRB exports to global OEMs such as Renault Volvo, Daimler Trucks, Volvo and Ingersoll * Promoters pledged shares : NIL
Rand, which has enabled it to combat current slowdown in the domestic automobile (% of share in issue)
industry. Exports constituted 21.7% of NRB’s total revenues in FY13 having increased
from 10% in FY11; exports logged 66.3% CAGR during the period. PRICE PERFORMANCE (%)
Stock over
Sensex Stock
Sensex
Capital requirement high
1 month (2.7) (14.5) (11.8)
The company manufactures and processes in-house which entails high capital
3 months (1.2) 5.0 6.2
requirements for funding growth. This helps generate better EBITDA margin, but leads
12 months 5.1 8.8 3.7
to lower asset turnover. Company incurred capex of INR2bn over the past two years
and hence its D/E is at a high 1.4x.
Valuations
Going forward, revenues to track recovery in the domestic auto market coupled with
growth in exports. The stock is trading at 7.39x trailing EPS.
Financials
Year to March FY10 FY11 FY12 FY13
Shradha Sheth
EBITDA (INR mn) 565 1,092 1,144 1,008
+91 22 6623 3308
Core profit (INR mn) 217 547 509 480 shradha.sheth@edelweissfin.com
Manoj Bahety, CFA
EPS (INR) 25.2 27.8 24.9 4.8
+91 22 6623 3362
EV/EBITDA (x) 4.3 3.9 4.6 5.9
ROAE (%) 12.7 28.5 23.1 22.3 February 19, 2014

Bearings
Income statement (INR mn) Balance sheet (INR mn)
Year to March FY10 FY11 FY12 FY13 As on 31st March FY10 FY11 FY12 FY13
Net revenues 3,427 4,930 5,764 6,080 Share capital 97 194 194 194
Raw material costs 1,157 1,680 2,058 2,281 Reserves & surplus 1,667 1,877 2,144 1,787
Gross profit 2,270 3,251 3,706 3,799 Shareholder equity 1,763 2,071 2,338 1,980
Employee expenses 660 853 950 1,020 Minority interest (14) (2) 9 17
Other expenses 1,045 1,306 1,613 1,772 Long term borrowings 353 650 1,830 1,871
Operating expenses 1,705 2,159 2,562 2,792 Short term borrowings 590 490 746 853
Total expenditure 2,862 3,839 4,620 5,073 Loan funds 943 1,140 2,575 2,723
EBITDA 565 1,092 1,144 1,008 Deferred tax liability/asset 128 116 119 102
Depreciation & amortisation 206 240 293 321 Sources of funds 2,821 3,325 5,040 4,822
EBIT 359 851 851 687 Gross fixed assets 3,826 4,236 5,001 4,966
Interest expense 105 71 154 206 Accumulated depreciation 2,150 2,390 2,686 2,779
Other income 92 35 36 102 Tangible assets 1,676 1,846 2,315 2,186
Profit before tax 345 816 734 582 CWIP (incl. intangible) 14 30 204 193
Provision for tax 128 268 225 102 Total net fixed assets 1,690 1,875 2,519 2,380
Core profit 217 547 509 480 Cash and cash equivalents 55 91 558 33
Extraordinary/ Prior period items (13) 0 - (4) Inventories 866 1,124 1,378 1,475
Profit after tax 205 548 509 477 Sundry debtors 746 1,025 1,256 1,515
Minority Interest (after tax) 0 12 10 9 Loans and advances 200 254 209 274
Net Profit after Minority Interest 205 536 499 468 Other assets - 178 379 296
Equity shares outstanding (mn) 48 97 97 97 Total current assets (ex cash) 1,813 2,581 3,221 3,560
EPS (INR) basic 25.2 27.8 24.9 4.8 Trade payable 453 609 640 670
Diluted shares (mn) 48.5 96.9 96.9 96.9 Other current liab. & prov. 284 613 618 480
EPS (INR) diluted 25.2 27.8 24.9 4.8 Total current liab. & prov. 737 1,223 1,258 1,151
CEPS 5.0 16.0 10.6 8.8 Net current assets (ex cash) 1,075 1,358 1,964 2,409
DPS 1.0 2.0 2.0 1.7 Application of funds 2,821 3,325 5,040 4,822
Dividend payout (%) 4.0 7.2 8.0 35.2 Book value per share (INR) 36 21 24 20
Common size metrics (% net revenues) Free cash flow (INR mn)
Year to March FY10 FY11 FY12 FY13 Year to March FY10 FY11 FY12 FY13
Gross margin 66.2 65.9 64.3 62.5 Net profit 205 536 499 468
Operating expenses 49.8 43.8 44.5 45.9 Add: Depreciation 206 240 293 321
EBITDA margins 16.5 22.1 19.8 16.6 Add: Int & other non-cash items* 597 (770) (651) (967)
EBIT margin 10.5 17.3 14.8 11.3 Gross cash flow 1,008 6 141 (178)
Interest 3.1 1.4 2.7 3.4 Less: Changes in working cap. 249 (401) (405) (522)
Net profit margin 6.3 11.1 8.8 7.9 Operating cash flow 759 406 546 344
Less: Capex* (116) (358) (1,134) (936)
Growth metrics (%) Free cash flow 875 764 1,680 1,280
Revenues 12.2 43.9 16.9 5.5
EBITDA 68.6 93.2 4.8 (11.9)
PBT 311.7 136.1 (10.0) (20.7)
Net profit 641.6 151.9 (7.0) (5.6)
EPS 472.5 10.4 (10.4) (80.6)

NRB Bearings
Profitability ratios Valuation parameters
Year to March FY10 FY11 FY12 FY13 Year to March FY10 FY11 FY12 FY13
ROACE (%) 20.0 75.0 54.4 34.0 Diluted EPS (INR) 25.2 27.8 24.9 4.8
ROAE (%) 12.7 28.5 23.1 22.3 Y-o-Y growth (%) 472.5 10.4 (10.4) (80.6)
ROA (%) 7.2 17.8 12.2 9.7 CEPS (INR) 5.0 16.0 10.6 8.8
Current ratio 2.5 2.1 2.6 3.1 Diluted P/E (x) 1.4 1.3 1.4 7.5
Quick ratio 1.3 1.2 1.5 1.8 P/BV (x) 1.0 1.7 1.5 1.8
Cash ratio 0.1 0.1 0.4 0.0 EV/Sales (x) 0.7 0.9 0.9 1.0
Receivable turnover (x) 4.6 5.6 5.1 4.4 EV/EBITDA (x) 4.3 3.9 4.6 5.9
Inventory turnover (x) 1.3 1.7 1.6 1.6 Dividend yield(%) 2.8 5.6 5.6 4.7
Payables turnover (x) 3.0 3.2 3.3 3.5
Receivables (days) 79 66 72 83
Inventory (days) 288 216 222 228
Payables (days) 123 115 111 105
Cash conversion cycle (days) 243 166 183 207
Operating ratios (x)

Fixed asset turnover 0.9 1.2 1.2 1.2
Core Fixed asset turnover 0.9 1.2 1.2 1.2

Miscellaneous
THIS PAGE IS INTENTIONALLY LEFT BLANK

COMPANY PROFILE
TIMKEN INDIA
Taper roller champ
Timken India (Timken), the fourth largest organised bearings player in EDELWEISS RATINGS
India with overall revenue market share of ~8%, is a leading Absolute Rating NOT RATED
manufacturer of tapered roller bearings with ~45% market share. In Investment Characteristics NA
terms of reach, the company has pan-India presence with ~87
distributors. Domestic CV growth and exports continue to be key growth
MARKET DATA (R: TIMK.BO, B: TMKN IN)
drivers. The stock is Not Rated.
CMP : INR 166
Target Price : NA
OEMs: Major revenue contributor
52-week range (INR) : 180 / 128
Strong global parentage has enabled Timken to supply to the OEMs and aftermarkets.
Domestic sales constitute 74% of its sales. Some of its key customers in automotives
include Indian Railways, New Holland Agriculture, FIAT, Escorts, Titagarh and Texmaco.
Avg. Daily Vol. BSE/NSE (‘000) : 84.6
In the industrial segment, its key customers are BHEL, Tata Steel and JSW Steel.
Exports: A strong driver
Exports constituted 26% of Timken’s FY13 revenues, which enabled it to combat Promoters * 75.0 75.0 75.0
slowdown in the domestic automobile industry. Exports logged 32% CAGR during 3.8 3.8 4.3
MF's, FI's & BKs
FY10-13.
FII's 6.1 6.1 4.7
Others 15.1 15.1 16.0
Traded sales leads to asset-light model * Promoters pledged shares : NIL
Timken’s key raw materials are semi-finished components, and the company does the
finishing process at its facility. Company also has traded revenues (25% contribution)
PRICE PERFORMANCE (%)
which are majorly imported from the parent. As a result, the business model is asset-
Stock over
light and cost structure is variable. However, core fixed asset turnover ratio (excluding Sensex Stock
Sensex
traded revenues) stood at 1.7xin FY13.
1 month (2.7) 1.7 4.4
3 months (1.2) (7.4) (6.2)
Valuations
12 months 5.1 (0.2) (5.2)
Going forward, revenues are expected to track the recovery in the domestic auto
market (CVs) coupled with growth in exports. The stock trades at 24x trailing EPS.
Financials
Year to March CY09 CY10 FY12 FY13
EBITDA (INR mn) 412 660 1,063 735 Shradha Sheth
+91 22 6623 3308
Core profit (INR mn) 326 522 807 442 shradha.sheth@edelweissfin.com
Manoj Bahety, CFA
EPS (INR) 5.1 8.2 12.7 6.9
+91 22 6623 3362
EV/EBITDA (x) 24.2 15.2 8.9 14.0
ROAE (%) 10.4 14.7 18.6 13.5 February 19, 2014

Bearings
Income statement (INR m) Balance sheet (INR m)
Year to March CY09 CY10 FY12 FY13 As on 31st March CY09 CY10 FY12 FY13
Net revenues 3,179 4,579 8,262 6,882 Share capital 637 637 637 637
Raw material costs 1,615 2,364 4,764 4,171 Reserves & surplus 2,658 3,169 2,494 2,777
Gross profit 1,564 2,215 3,497 2,711 Shareholder equity 3,295 3,806 3,131 3,415
Employee expenses 319 451 613 523 Deferred tax liability/asset (4) (37) (27) (44)
Other expenses 833 1,104 1,821 1,454 Sources of funds 3,291 3,769 3,264 3,384
Operating expenses 1,152 1,555 2,434 1,977 Gross fixed assets 2,005 2,090 2,416 2,514
Total expenditure 2,767 3,919 7,198 6,147 Accumulated depreciation 1,437 1,509 1,622 1,724
EBITDA 412 660 1,063 735 Tangible assets 568 582 795 790
Depreciation & amortisation 103 112 149 139 Intangible assets - - 2 1
EBIT 309 548 914 595 CWIP (incl. intangible) 109 25 102 257
Interest expense 4 9 12 13 Total net fixed assets 676 607 899 1,049
Other income 145 190 203 55 Non current investments - - 0 0
Profit before tax 449 730 1,106 637 Current investments - - 659 318
Provision for tax 124 207 299 195 Investments 1,691 2,103 659 319
Core profit 326 522 807 442 Cash and cash equivalents 75 31 118 140
Extraordinary/ Prior period items (0) (11) - - Inventories 673 1,053 1,476 1,403
Profit after tax 325 511 807 442 Sundry debtors 507 823 1,094 1,294
Equity shares outstanding (mn) 63.7 63.7 63.7 63.7 Loans and advances 262 235 255 256
EPS (INR) basic 5.1 8.2 12.7 6.9 Other assets 0 0 66 125
Diluted shares (mn) 63.7 63.7 63.7 63.7 Total current assets (ex cash) 1,442 2,110 2,891 3,079
EPS (INR) diluted 5.1 8.2 12.7 6.9 Trade payable 484 790 974 658
CEPS 3.5 6.4 10.3 4.8 Other current liabilities & prov. 110 293 328 545
DPS - - 20.0 2.0 Total current liabilities & prov. 594 1,083 1,302 1,203
Dividend payout (%) - - 158.0 28.8 Net current assets (ex cash) 848 1,028 1,588 1,876
Application of funds 3,291 3,769 3,264 3,384
Common size metrics (% net revenues) Book value per share (INR) 52 60 49 54
Gross margin 49.2 48.4 42.3 39.4 Free cash flow
Operating expenses 36.2 34.0 29.5 28.7 Year to March CY09 CY10 FY12 FY13
EBITDA margins 13.0 14.4 12.9 10.7 Net profit 325 511 807 442
EBIT margin 9.7 12.0 11.1 8.7 Add: Depreciation 103 112 149 139
Interest 0.1 0.2 0.1 0.2
Add: Int & other non-cash items* (96) (81) (87) 12
Gross cash flow 332 542 869 594
Less: Changes in working cap. (252) 158 528 462
Growth metrics (%)
Operating cash flow 584 384 341 131
Less: Capex* 81 37 443 302
Revenues (21.4) 44.0 44.3 4.1
Free cash flow 503 347 (102) (170)
EBITDA (37.7) 60.3 28.8 (13.6)
PBT (42.0) 62.4 21.2 (27.9)
Net profit (38.2) 60.4 23.6 (31.4)
EPS (38.2) 60.4 23.6 (31.4)

Timken India
Profitability ratios Valuation parameters

Year to March CY09 CY10 FY12 FY13 Year to March CY09 CY10 FY12 FY13
ROACE (%) 18.7 34.7 35.5 22.0 Diluted EPS (INR) 5.1 8.2 12.7 6.9
ROAE (%) 10.4 14.7 18.6 13.5 Y-o-Y growth (%) (38.2) 60.4 54.5 (45.1)
ROA (%) 10.4 14.8 18.3 13.3 CEPS (INR) 3.5 6.4 10.3 4.8
Current ratio 2.4 1.9 2.2 2.6 Diluted P/E (x) 31.7 19.8 12.8 23.3
Quick ratio 1.3 1.0 1.1 1.4 P/BV (x) 3.1 2.7 3.3 3.0
Cash ratio 0.1 0.0 0.1 0.1 EV/Sales (x) 3.1 2.2 1.1 1.5
Receivable turnover (x) 4.9 6.9 8.6 5.8 EV/EBITDA (x) 24.2 15.2 8.9 14.0
Inventory turnover (x) 2.1 2.7 3.8 2.9 Dividend yield(%) - - 12.3 1.2
Payables turnover (x) 2.8 3.7 5.4 5.1
Receivables (days) 74 53 53 63
Inventory (days) 171 133 121 126
Payables (days) 132 98 84 71
Cash conversion cycle (days) 114 88 89 118
Operating ratios (x)

Fixed asset turnover 1.6 2.2 2.9 2.8

Miscellaneous
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com
Vikas Khemani Head Institutional Equities vikas.khemani@edelweissfin.com +91 22 2286 4206
Nischal Maheshwari Co-Head Institutional Equities & Head Research nischal.maheshwari@edelweissfin.com +91 22 4063 5476
Nirav Sheth Head Sales nirav.sheth@edelweissfin.com +91 22 4040 7499
Coverage group(s) of stocks by primary analyst(s): Miscellaneous

AIA Engineering, Balkrishna Industries, VIP Industries
Recent Research
Date Company Title Price (INR) Recos
04-Feb-14 Balkrishna Improving volumes; strong 333 Buy
Industries margins; Result Update
31-Jan-14 VIP CSD turnaround, operating 61 Buy
Industries margin uptick;
Result Update
28-Jan-14 AIA Strong operating margins; 501 Buy
Engineering Result Update
Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe Rating Interpretation
Buy Hold Reduce Total Rating Expected to

Rating Distribution* 122 47 14 184 Buy appreciate more than 15% over a 12-month period
* 1 stocks under review
Hold appreciate up to 15% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn
Reduce depreciate more than 5% over a 12-month period
Market Cap (INR) 118 54 12

Timken India
DISCLAIMER
General Disclaimer:
This report has been prepared by Edelweiss Securities Limited (Edelweiss). Edelweiss, its holding company and associate
companies are a full service, integrated investment banking, portfolio management and brokerage group. Our research analysts
and sales persons provide important input into our investment banking activities. This report does not constitute an offer or
solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information
contained herein is from publicly available data or other sources believed to be reliable, but we do not represent that it is
accurate or complete and it should not be relied on as such. Edelweiss or any of its affiliates/ group companies shall not be in any
way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in
this report. This report is provided for assistance only and is not intended to be and must not alone be taken as the basis for an
investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this report should
make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of
companies referred to in this report (including the merits and risks involved), and should consult his own advisors to determine
the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors. We
and our affiliates, group companies, officers, directors, and employees may: (a) from time to time, have long or short positions in,
and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such
securities and earn brokerage or other compensation or act as advisor or lender/borrower to such company (ies) or have other
potential conflict of interest with respect to any recommendation and related information and opinions. This information is
strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or
redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any
purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or
located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be
contrary to law, regulation or which would subject Edelweiss and affiliates/ group companies to any registration or licensing
requirements within such jurisdiction. The distribution of this report in certain jurisdictions may be restricted by law, and persons
in whose possession this report comes, should inform themselves about and observe, any such restrictions. The information given
in this report is as of the date of this report and there can be no assurance that future results or events will be consistent with this
information. This information is subject to change without any prior notice. Edelweiss reserves the right to make modifications
and alterations to this statement as may be required from time to time. However, Edelweiss is under no obligation to update or
keep the information current. Nevertheless, Edelweiss is committed to providing independent and transparent recommendation
to its client and would be happy to provide any information in response to specific client queries. Neither Edelweiss nor any of its
affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct,
indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the
information. Past performance is not necessarily a guide to future performance. The disclosures of interest statements
incorporated in this report are provided solely to enhance the transparency and should not be treated as endorsement of the
views expressed in the report. Edelweiss Securities Limited generally prohibits its analysts, persons reporting to analysts and their
dependents from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The
information provided in these reports remains, unless otherwise stated, the copyright of Edelweiss. All layout, design, original
artwork, concepts and other Intellectual Properties, remains the property and copyright Edelweiss and may not be used in any
form or for any purpose whatsoever by any party without the express written permission of the copyright holders.
Analyst Certification:
The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about
the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or
indirectly related to specific recommendations or views expressed in this report.
Analyst holding in the stock: No.
Edelweiss shall not be liable for any delay or any other interruption which may occur in presenting the data due to any reason
including network (Internet) reasons or snags in the system, break down of the system or any other equipment, server
breakdown, maintenance shutdown, breakdown of communication services or inability of the Edelweiss to present the data. In no
event shall the Edelweiss be liable for any damages, including without limitation direct or indirect, special, incidental, or
consequential damages, losses or expenses arising in connection with the data presented by the Edelweiss through this
presentation.

Miscellaneous
Disclaimer for U.S. Persons
This research report is a product of Edelweiss Securities Limited, which is the employer of the research analyst(s) who has
prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States
(U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to
supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required
to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public
appearances and trading securities held by a research analyst account.
This report is intended for distribution by Edelweiss Securities Limited only to "Major Institutional Investors" as defined by Rule
15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and
Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as
specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied,
duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor.
In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC
in order to conduct certain business with Major Institutional Investors, Edelweiss Securities Limited has entered into an
agreement with a U.S. registered broker-dealer, Enclave Capital, LLC ("Enclave").
Transactions in securities discussed in this research report should be effected through Enclave Capital, LLC.
Disclaimer for U.K. Persons
The contents of this research report have not been approved by an authorised person within the meaning of the Financial
Services and Markets Act 2000 ("FSMA").
In the United Kingdom, this research report is being distributed only to and is directed only at (a) persons who have professional
experience in matters relating to investments falling within Article 19(5) of the FSMA (Financial Promotion) Order 2005 (the
“Order”); (b) persons falling within Article 49(2)(a) to (d) of the Order (including high net worth companies and unincorporated
associations); and (c) any other persons to whom it may otherwise lawfully be communicated (all such persons together being
referred to as “relevant persons”).
This research report must not be acted on or relied on by persons who are not relevant persons. Any investment or investment
activity to which this research report relates is available only to relevant persons and will be engaged in only with relevant
persons. Any person who is not a relevant person should not act or rely on this research report or any of its contents. This
research report must not be distributed, published, reproduced or disclosed (in whole or in part) by recipients to any other
person.
Disclaimer for Canadian Persons
This research report is a product of Edelweiss Securities Limited ("ESL"), which is the employer of the research analysts who have
prepared the research report. The research analysts preparing the research report are resident outside the Canada and are not
associated persons of any Canadian registered adviser and/or dealer and, therefore, the analysts are not subject to supervision by
a Canadian registered adviser and/or dealer, and are not required to satisfy the regulatory licensing requirements of the Ontario
Securities Commission, other Canadian provincial securities regulators, the Investment Industry Regulatory Organization of
Canada and are not required to otherwise comply with Canadian rules or regulations regarding, among other things, the research
analysts' business or relationship with a subject company or trading of securities by a research analyst.
This report is intended for distribution by ESL only to "Permitted Clients" (as defined in National Instrument 31-103 ("NI 31-103"))
who are resident in the Province of Ontario, Canada (an "Ontario Permitted Client"). If the recipient of this report is not an
Ontario Permitted Client, as specified above, then the recipient should not act upon this report and should return the report to
the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any Canadian person.
ESL is relying on an exemption from the adviser and/or dealer registration requirements under NI 31-103 available to certain
international advisers and/or dealers. Please be advised that (i) ESL is not registered in the Province of Ontario to trade in
securities nor is it registered in the Province of Ontario to provide advice with respect to securities; (ii) ESL's head office or
principal place of business is located in India; (iii) all or substantially all of ESL's assets may be situated outside of Canada; (iv)
there may be difficulty enforcing legal rights against ESL because of the above; and (v) the name and address of the ESL's agent for
service of process in the Province of Ontario is: Bamac Services Inc., 181 Bay Street, Suite 2100, Toronto, Ontario M5J 2T3 Canada.
Copyright 2009 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved
Access the entire repository of Edelweiss Research on www.edelresearch.com

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098
Tel: +91 22 4009 4400. Email: research@edelweissfin.com

Bearings Sector 140221 Edelweiss Initiating Coverage FAG Bearing SKF India NRB Bearings Timken India Sector Report PDF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Bearings Sector 140221 Edelweiss Initiating Coverage FAG Bearing SKF India NRB Bearings Timken India Sector Report PDF

Uploaded by

Copyright:

Available Formats

BANYAN

Shradha Sheth Manoj Bahety, CFA

1. Good corporate governance history

2. Healthy balance sheet with robust cash flows

3. May have low liquidity

4. Low or no management access

5. Not widely covered

6. Low institutional holding

As always, we await your valuable feedback.

1 Edelweiss Securities Limited

2 Edelweiss Securities Limited

India bearing industry: Overview ............................................................................................. 5

Evolution of domestic bearings industry.................................................................................. 8

Industry revenues and market share of players ...................................................................... 9

Industry drivers ...................................................................................................................... 14

Steady long-term financials.................................................................................................... 18

Global bearings industry ........................................................................................................ 26

Companies (Initiating Coverage)

Timken India .......................................................................................................................... 81

3 Edelweiss Securities Limited

Edelweiss Securities Limited

Indian bearing industry: Overview

Indian bearings industry

India accounts for less than 4% of

Source: Industry, Edelweiss research

Chart 1: Type of demand - OEMs a major demand driver

Source: Industry, Edelweiss research

5 Edelweiss Securities Limited

Chart 2: User segments

6 Edelweiss Securities Limited

Table 1: Competitive landscape

Source: Source: Industry, Edelweiss research

7 Edelweiss Securities Limited

Evolution of domestic bearings industry

Chart 4: Revenue growth healthy through cycles

56,000 13% CAGR

Table 2: Domestic manufacturing outpacing industry

Import substitution and plateauing unorganised market

8 Edelweiss Securities Limited

Industry revenues (CY12/FY13) and revenue market share of players

Revenue contribution of top bearings company wise

Chart 6: SKF India—Major revenue contributors

Deep grove ball

9 Edelweiss Securities Limited

Chart 7: FAG Bearings—Major revenue contributors

Chart 8: NRB Bearings—Major revenue contributors

NRB - A strong player in niche

Source: Company, Edelweiss research

10 Edelweiss Securities Limited

Fig.2: SKF India

Auto - 45% Industries - 49% Exports - 6%

OEM - 70% Replacement - 30% OEM - 33% Replacement - 67%

Source: Company, Edelweiss research

Fig. 3: FAG Bearings

Auto - 35% Industries - 51% Exports - 14%

OEM - 66% Replacement - 33% OEM - 65% Replacement - 35%

Fig. 4: NRB Bearings

Auto - 80% Exports - 22%

OEM - 82% Replacement - 18%

Source: Company, Edelweiss research

11 Edelweiss Securities Limited

35% of overall revenues from

Chart 9: Aftermarket segment a major contributor