Multi Baggers

SKF India: Changing business environment will have positive BEARING on company's shareholders

About SKF:

Incorporated in 1961, SKF India is the Indian subsidiary of the Sweden based SKF Group, which is a global leader in bearings, seals & lubrication systems. The company is a leader in the Indian bearing market with ~27 percent market share. SKF is well diversified across the automotive (53.2 percent of revenues including exports, which are manufactured in India) and industrial segment (46.6 percent of revenues, which are mainly imported from SKF Group companies) as well as SKF Technologies.

In the automotive segment, SKF India caters to both two-wheelers as well as four-wheelers (PV, CV, tractors, etc.) of which two-thirds come from OEMs and remaining from the replacement markets. SKF India caters to almost all automotive OEMs in India such as Tata Motors, Hero MotoCorp, HMSI, Maruti, Bajaj Auto, Mahindra & Mahindra, SKF India supplies to all major industries like heavy industries such as steel, mining etc, agriculture, power, capital goods, oil & gas and food & beverage (F&B). Within industrial, approx. 65 percent pertains to aftermarket and 35 percent to OEMs.

SKF India has three manufacturing facilities:

Pune:  It produces deep groove ball bearing, tapered roller bearing, truck hub units, hub bearing units, etc. for the automotive & industrial (small portion) segments

Bangalore: It produces deep groove ball bearing and value-added solutions like rocker arm bearing, rocker arm assembly, clutch lifter, cam follower, cylindrical rollers, solid oil ball cage, steering column bearings and one way clutch for the automotive & industrial (small portion) segments

Haridwar: Established in 2010, it produces deep groove ball bearings for the two-wheelers segment

India's largest manufacturer of bearings having market share of 27 percent is going to benefit from changing business environment. If segment wise revenue is viewed we expect its automotive segment is going to grow at rapid pace and industrial segment which is 45 percent of total revenue is also going to generate higher growth rate as economy shows signs of recovery. The king of Bearing Market will have positive Bearing for its shareholders

Key Triggers

Groove Ball bearings which is 35 percent of total revenue will drive growth and contribute to the bottom-line

Import Substitutions The key catalyst SKF technologies ramp up of capacity will have positive bearing on SKF India earning as more import substitute products will be offered which will result in higher margins. We expect company to report margin expansion from 11.5 percent to over 13.7 percent over next year

Open Offer: Our quant model suggest Bearing giant SKF may have something to offer for its small shareholders. In 2013 Kaydon was acquired by SKF @Annualized Equivalent Value of 11 percent the PEG assigned was 1.35 times. Similarly SKF acquired Lincoln at PEG of 1.38 times. One thing in common was there was expected pick-up in demand in the two geographies and off late there has been buzz on the street. If so we will not be surprised that SKF trades at a valuation close to what was offered to acquire other players in such a scenario SKF will trade in range of 1525-1600. But the premium can increase further if delisting is considered by the management in such a scenario we aligned one of our old pick ATLAS copco and found some similar traces in price volume pattern(though different management.

Automotive demand likely to Pick up: New model launches and a healthy pipeline from all the players will have positive impact on the Bearing giant.

We did sensitive analysis on the stock under stringent conditions  the company has capability to give ROE of over 15 percent and one impressive goal as  set by SKF Sweden they want overall Return to be around 20 percent when we did expand the sensitive analysis we expect there will be PE expansion on the stock and stock will trade at par to PEG of 1.3 times which translates around 1550-1600 which is same range as reflected by the open offer model we have. Thus a likely possibility this range to be visited over next 6-8 month time frame.

The stock does three times the sales Timken India does, but Sales to Market cap of SKF is 2.5 times vs Timken Sales to Market cap ~3.4 times. Our model suggest the new product pipeline launch and demand pickup in automotive segment will have higher growth for SKF thus there will be smart money that may look at the price differential. SKF risk reward looks lucrative compare to other peers and positive trigger of Open offer or even delisting will further expand its PE.

Disclosure (SEBI Registration Number for Aashish Tater: INA300001206)

Stock Ownership - No

Stock traded in Last 30 days (No trading or investment activities done) - No

Stock Recommended to Clients - Yes

Remuneration/Benefits received from SKF in 12 months - No

Merchant Banking Market Making activities / projects - No

Any arrangement with co. to affect the report write up - No