Bearings Industry: Overcoming Market Frictions to Stay Ahead | CORPORATE ETHOS

Bearings Industry: Overcoming Market Frictions to Stay Ahead

By: | May 22, 2018
Bearings Industry

Bearings have become indispensable in engineering, automotive industry by helping reduce energy costs, improve productivity. Essentially bearings are meant to reduce friction and save energy. Different types of bearings are used in industry-ball bearings, roller bearings and plain bearings.

The bearings industry has been heavily dependent on imports as major players have global operations. Seeing the market potential in India, several multinationals have reigned supreme in this industry. The bearings industry is highly organized in India with small unorganized local bearings players catering to aftermarket or replacement segment of the industry.

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With increased automobile production, automotive bearings demand is expected to grow rapidly in the next few years. Expanding middle class, rising disposable income leading to increased sale of vehicles and machines are positive for the bearings market. Deep grove ball bearing angular is the most preferred type of automotive bearings in India. Region-wise, north region is the largest demand generating region for automotive bearings in the country.

Amidst the positive growth trends, here is a look at the prospects of major listed players.
#NRB Bearings Ltd  (BSE:530367, NSE: NRBEARING) Category:Small Cap

NRB Bearings was set up in 1965 and was the first company to manufacture needle roller bearings in India. Today it is recognized leader in needle roller bearings, conventional cylindrical roller bearings and has developed light weight drawn cup bearings. The company is led by the wonder woman Harshbeena Zaveri, Vice Chairman and MD who joined the company as a trainee in 1987. Now the company caters to global automotive majors such as Mercedes, Audi, Volvo, Daimler and Mazda.

The company has three subsidiaries-SNL Bearings, NRB Bearings (Thailand) Ltd and NRB Bearings Eurpoe GmbH. The company’s standalone net profit in the second quarter of FY18 rose to Rs 21.14 crore and in the third quarter registered an increase of over 170 per cent compared to the previous year.

The company’s revenues grew to Rs 727.59 cr in FY17 from Rs 674.93 cr the previous year while net profit rose to Rs 53.97 cr from Rs 41.99 cr.  In Q4FY18, the net profits have risen 106.87% to Rs 26.79 cr while sales rose 24.72% to Rs 235.33 cr.

It has given a half-yearly return of 16.87%, 39.19% annual, return on equity of 17.02%, on assets 7.27%, net profit margin of 7.41%. It is trading at a Price Earnings Ratio (PE) of 19.09 and not expensively priced as industry PE stands at 36.14. On an annualized basis it has outperformed sensex by 25.885.

On technical charts, RSI of 44.80 indicates bearishness, ADX of 21 indicates range bound trade and MACD had witnessed a bearish crossover. Positive factors based on Q4 results are highest operating profit to interest-12.55%, net profit highest at Rs 26.79 cr.

Target: 175  Duration: 3 weeks

#SKF India Ltd (BSE: 500472, NSE: SKFINDIA) Category: Mid Cap

AB SKF was set up in 1907 while the Indian operations were started in 1923. It supplies products to 40 industries-bearings and units, seals, mechatronics, services and lubrication system.  In India it has a 6 manufacturing facilities, 12 offices, a supplier network of over 300 distributors and an employee base of more than 2600 dedicated professionals. It has consolidated its operations in three companies namely, SKF India Ltd, SKF Technologies (India) Pvt Ltd and Lincoln Helios India Ltd.

Net sales in FY18 rose 4.5% (taking into account reclassification due to GST implementation) to
Rs 2804.8 cr as against Rs 2835.5 cr the pevious year. Net profit rose to Rs 295.9 cr as against Rs 243.9 cr the previous year.

Q4FY18 net profit rose 23.59% to Rs 71.56 cr while sales rose 7.63% to Rs 703.64 cr. Earnings per share has risen to 13.90. Half yearly returns are 3.88% and yearly 12.39%. Return on equity 13.46%, assets 111.50%, net profit margin 9.26%. Liquidity and cash flow ratios are also attractive. It is trading at a PE of 30.75, indicating higher valuation by market. Highest net sales and 27.97% growth in net profit, highest return on capital employed at 23.96% make it attractive.

On technical charts, MACD has witnessed a bullish crossover, RSI of 62 indicates bullishness and ADX of 23 indicates range bound trading.
Target: 1805  Duration: 4 weeks.
#Bimetal Bearings Ltd (BSE: 505681) Category: Small Cap

Bimetal Bearings Ltd belongs to the Amalgamations Group, one of India’s largest light engineering conglomerates. The company is a leading manufacturer of engine bearings, bushings, thrust washes, alloy powder and bimetallic strips. It was established in 1961 in collaboration with Clevite Inc, USA and Repco Ltd, Australia. It has seven manufacturing facilities spread out in Chennai, Coimbatore, Hosur, Chennai, Coimbatore and Hosur.

The company reported a net profit of Rs 1.74 cr in Q3FY18. Sales rose 51.78% to Rs 45.19 cr. It has given an annualized return of 34.03% to investors. It doesn’t fare well on financial ratios with return on equity of 2.49%, assets of 2.60%, net profit margin of 2.83%, while cash flow and liquidity present a mixed picture.  It is trading at a PE of 18 indicating that it is moderately priced.

The net profit on a half yearly basis has grown 85.27% while return on capital employed was highest at 5.31%.  With no interest cost, the company is nearly a zero-debt company. It has outperformed the Sensex on annualized basis by 20.63% and outperformed the bearings sector by 22.82%. With cash of Rs 8.17 cr, short term liquidity is growing and it reported the highest inventory turnover ratio on half yearly basis at 4.07 times. On the negative site with depreciation rising to Rs 1.19 cr in Q4, capital expenditure is climbing.
On technical charts, RSI of 67.54 indicates bullishness, while ADX of 33 denotes uptrend and MACD has witnessed a bullish crossover.
Target: 550 Duration : 2 weeks

Summary
The bearings industry in India had faced rough weather due to demonetization, GST implementation in the past two years but successfully overcome the crisis. Steady economic growth and increased in automobile demand have been the main drivers of bearings industry.

Over the past ten years, India has emerged as one of the most preferred locations in the world for manufacturing high quality auto components and vehicles of all kinds. The Industry has to be equally relentless in its pursuit of economies of scale and in scope of design and engineering of automobiles and components, while also pursuing low cost manufacturing destinations.

India Government has announced the Automotive Mission Plan (AMP) 2026 to help the Indian Automotive industry to focus on its strengths and improve its competitiveness in select segments and achieve the target of 12% contribution to National GDP. The leading players in this industry are all doing business on a global scale and investing in R&D to reduce costs for customer and their total cost of ownership.

Analysts expect the bearings market revenue to grow at a compounded annual growth rate (CAGR) of 19.8% over FY15-19.

Investors can gain with a selective exposure to bearings market. Among the major players not covered in this analysis- Timken India and ABC Bearings are quite expensive at this point and several small caps don’t qualify for valuation.