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1

Bearings Industry Sector Update

Outlook : BULLISH

SKF India - Buy CMP: Rs 1,250 Target price : Rs 1,432 Upside: 15% NRB Bearings– Buy CMP: Rs 144 Target price : Rs 179 Upside: 24% Menon Bearings– Buy CMP: Rs 51 Target price : Rs 68 Upside: 32% Timken India - Buy CMP: Rs 546 Target price : Rs 719 Upside: 32% FAG Bearings- Not Rated CMP: Rs 4,020 Ravikant Sangepag Research Analyst [email protected] December 09, 2015

The Growing Global Bearings market :

The global bearings market grew 4% in CY14 reaching total size of USD 40 billion. The

industrial original equipment bearing markets accounted for ~40% of world demand and

included manufacturers of light and heavy industrial machines and equipment, as well as

aerospace, off-highway and railway vehicles. Sales through distributors (industrial

distribution and the independent vehicle aftermarket) maintained around 30% of world

bearing demand, of which around 30% is related to the vehicle service market and around

70% to the industrial market. The automotive original equipment bearing markets, including

two and four-wheelers, accounted for ~30%.

Europe accounts for 25% of the total world market with Germany alone accounting for

almost 10%. The Americas now represent slightly more than 20% of global demand, of which

the USA, Canada and Mexico together account for about 80%. In South America, Brazil is the

major market and makes up more than 60% of regional demand. Asia’s share of the world

bearing market was relatively unchanged and accounted for almost 50% compared with less

than 30% ten years ago. China’s share of the total world bearing market was slightly down to

about 25%. Japan’s share of the world bearing market accounts for slightly more than 10%.

Other Asian markets with sizeable bearing production account for about 10%, including

India, Thailand, Indonesia, Malaysia and the Republic of Korea. The Indian bearing market

accounts for less than 5% of the world bearing market.

SKF is the world leader on the bearings market with other major international companies

including the Schaeffler Group, Timken, NSK, NTN, and JTEKT. The top 6 world bearing

manufacturers represent about 60% of the global rolling bearing market while the group of

Chinese bearing companies, including small and larger ones, represents less than 20% in

the world with more than 80% of their sales in Asia, less than 10% in Europe, less than 7% in

Americas. The remaining 20% of Chinese bearing companies includes many smaller regional

competitors.

Domestic Bearing market ready to roll:

The current size of the bearings market in India inclusive of exports stands at ~8500 Cr.

~40% of the total demand is fulfilled through imports from from countries like Germany,

Japan, China, Singapore, Sweden, France and Italy with the balance being made locally. A

major portion of bearings market in India is unorganized that caters to the low-end

replacement market.. The demand for the bearings is derived from two key user segments -

the automotive and industrial sectors. Domestic bearings industry is fairly concentrated,

with the top five players contributing over 90% of overall turnover. SKF India is the leading

player in the market followed by FAG Bearings, NBC Bearings and Timken India.

The revenue projections for the bearings market in India anticipates that the market is

estimated to grow at a CAGR of 19.8% over FY’2015-FY’2019 owing to the stable economic

growth in the forthcoming years and the support from government. The ‘Make in India’

initiative launched by the newly formed government is expected to be the catalyst for

inclining manufacturing activities in the country which will increase the bearings

consumption in the forthcoming years. We believe that the surge in exports, incline in

demand for passenger vehicles, two wheelers & four wheelers as well as elevation in

number of heavy, general and other Industries will transpire the growth of bearings market

of India in years to come.

2

Bearings Industry

Bearings Industry Overview

Bearings are mechanical components used to enable rotational or linear movement, and to disable

the unwanted friction and handling stress. Bearings are extensively used in the rotating parts of

virtually all machines, making precision in dimension key to performance. The structure of ball

bearing is simple, it has a ball, which has internal & external smooth metal surfaces, which helps

bearings to move. The ball in the bearing is responsible for carrying the weight of the load, and

load’s weight is responsible for giving a push to the bearing’s rotation.

There are different types of bearings used in the automotive an industrial applications, such as ball,

roller & thrust bearings, housed units, needle roller bearings, plain bearings, plummer blocks,

sleeves, slim section bearings, spherical roller bearings, etc. For instance, applications such as

wheels and transmissions use roller bearings, as roller bearings support heavy-duty applications.

Global Industry

The global bearings market is generally seen as the worldwide sales of rolling bearings, comprising

ball and roller bearing assemblies of various designs, including mounted bearing units. The global

rolling bearing market size in 2014 in volume increased by 4% year over- year and reached USD 40

billion. The industrial original equipment bearing markets accounted for almost 40% of world

demand and included manufacturers of light and heavy industrial machines and equipment, as well

as aerospace, off-highway and railway vehicles. Sales through distributors (industrial distribution

and the independent vehicle aftermarket) maintained around 30% of world bearing demand, of

which around 30% is related to the vehicle service market and around 70% to the industrial market.

The automotive original equipment bearing markets, including two and four-wheelers, accounted for

more than 30%.

Europe accounts for 25% of the total world market with Germany alone accounting for almost 10%.

The Americas now represent slightly more than 20% of global demand, of which the USA, Canada

and Mexico together account for about 80%. In South America, Brazil is the major market and

makes up more than 60% of regional demand. Asia’s share of the world bearing market was

relatively unchanged and accounted for almost 50% compared with less than 30% ten years ago.

China’s share of the total world bearing market was slightly down to about 25%. Japan’s share of

the world bearing market accounts for slightly more than 10%. Other Asian markets with sizeable

bearing production account for about 10%, including India, Thailand, Indonesia, Malaysia and the

Republic of Korea.

The Chinese bearing market, which remains the largest of the emerging markets, is very

fragmented, with the main international bearing companies accounting for about one third of the

market while the other two thirds of the market consists of a host of local manufacturers. Some of

the largest include: Wafangdian (ZWZ), Luoyang (LYC), Harbin (HRB), Zhejiang Tianma (TMB),

Wanxiang Qianchao, and C&U.

The Indian bearing market accounts for less than 5% of the world bearing market. The players in

that market include international manufacturers and several local manufacturers such as NEI, NRB,

ABC and TATA. SKF is the world leader on the bearings market with other major international

companies including the Schaeffler Group, Timken, NSK, NTN, and JTEKT. The top 6 world

bearing manufacturers represent about 60% of the global rolling bearing market while the group of

Chinese bearing companies, including small and larger ones, represents less than 20% in the world

with more than 80% of their sales in Asia, less than 10% in Europe, less than 7% in Americas. The

remaining 20% of Chinese bearing companies includes many smaller regional competitors.

3

Bearings Industry

Radial deep groove ball bearings are the most common rolling bearing type, accounting for almost

30% of the world bearing demand. Other major ball bearing types include angular contact ball

bearings, self-aligning ball bearings, thrust ball bearings and automotive wheel hub ball bearing

units. Roller bearings account for less than half of worldwide rolling bearing sales. Roller bearings

are named after the roller shape, such as cylindrical roller bearings, needle roller bearings, tapered

roller bearings and spherical roller bearings. All of these are available for loads acting across the

shaft (radial bearings) and for loads that are parallel with the shaft (thrust bearings). The largest

roller bearing family is the tapered roller bearing, with about 20% of the world bearing market.

Domestic Industry

The current size of the bearings market in India inclusive of exports stands at ~8500 Cr. A major

portion of bearings market in India is organized (~90%) that caters to OEM’s and large part of

replacement market while small scale unorganized players (~10%) have presence in the low-end

replacement market. A significant (~40%) portion of bearings are imported from countries like

Germany, Japan, China, Singapore, Sweden, France and Italy. The demand for the bearings is

derived from two key user segments - the automotive and industrial sectors. The industrial market is

larger than the automobile market in value terms..

The Indian market is characterized with challenges like counterfeit/spurious products, volatile prices of raw materials and growing cost pressure on Indian suppliers. The bearings industry is fairly concentrated, with the top five players contributing over 90% of overall turnover. SKF India is the leading player in the market followed by FAG Bearings, NBC Bearings and Timken India. To meet growing customer expectations, most of the bearings manufacturers have regularly invested in modern manufacturing technology and have taken a number of initiatives to strengthen their competitive advantage by partnering with customers with a focus on application engineering and R&D to develop advanced products. The demand for bearings is largely dynamic because the industry is closely linked to global GDP

trends owing to its extensive applications in production and engineering industries across the world.

The global bearings industry was worth USD ~ 40 billion during 2014. Several main industrial

sectors and user segments are expected to push the production of industrial equipment and

automotives, leading to an increase in demand for railway equipment, electronics, aircraft and

motorcycles in the developing countries.

The bearings industry in India has been heavily dependent upon imports as the major players are

global entities which import majority of products from their global manufacturing units located

abroad. India is largely regarded amongst the fastest growing market for bearings in the world

which has ultimately led to a number of multinational companies emerge the Indian markets such as

SKF, Timken and FAG bearings. The Indian bearings Industry in present is quite bullish with

excellent growth prospects, owing to spurt in growth of automobile and industrial sector which has

given substantial rise to the demand for bearings.

The revenue projections for the bearings market in India anticipates that the market is estimated to

grow at a CAGR of 19.8% over FY’2015-FY’2019 owing to the stable economic growth in the

forthcoming years and the support from government. The ‘Make in India’ initiative launched by the

newly formed government is expected to be the catalyst for inclining manufacturing activities in the

country which will increase the bearings consumption in the forthcoming years. The surge in

exports, incline in demand for passenger vehicles, two wheelers & four wheelers as well as

elevation in number of heavy, general and other Industries has transpired the growth of bearings

market of India. The government has already made clear its continuing focus on infrastructure from

Power and Oil & Gas, Airports Roads and Ports. As per the planning commission’s estimates, the

government has planned substantial investment in the 12th Five Year Plan which has been

aggregated at about Rs 1 trillion. This infrastructure spending will lead to growth in the

manufacturing sector which in turn will have a positive impact on bearings industry. The focus on

renewable energy will further lead to increased demand for bearings in India as wind and water

turbines require heavy usage of bearings to convert the kinetic energy into electricity.

4

Bearings Industry

Relative Comparison of companies under coverage

FY15/(*CY14) CMP (Rs)

M-Cap (Rs Cr)

Revenue (Rs Cr)

EBITDA (Rs Cr)

PAT (Rs Cr)

EBITDAM (%)

PATM (%)

P/E (x)

P/BV (x)

RoE (%)

SKF India* 1,250 6,592 2,416 283 203 11.7 8.4 32.5 0.0 15.1

NRB Bearings 144 1,395 670 124 53 18.5 7.9 26.2 5.1 22.5

Menon Bearings 51 236 103 23 12 21.8 11.2 20.6 5.5 29.3

FAG Bearings* 4,020 6,680 1,675 283 153 16.9 9.1 43.7 6.0 14.6

Timken India 546 3,713 926 134 81 14.4 8.7 46.0 8.5 19.7

Our recommendations…

SKF India Ltd (SKF) – Buy:

SKF India, is domestic arm of SKF Group, a leading global supplier of products, solutions and services within rolling bearings, seals, mechatronics, services and lubrication systems. Services include technical support, maintenance services and condition monitoring. Incorporated in 1961, today, with 3 manufacturing facilities located in Pune, Bangalore and Haridwar, with 11 sales offices across India and a supplier network of over 300 distributors, SKF continues to serve bearing industry for over 4 decades. SKF is the largest manufacturer of the bearings in India with ~28% market share in domestic bearing industry. With revival in both automobile and industrial activities, we expect SKF to clock revenue growth of CAGR 8% from CY14 to CY18. SKF has recently forayed in both renewable and railway segment. With new government clearly targeted to provide impetus to these industries SKF is well positioned to benefit from huge investments envisaged in these industries in medium to longer term. With Ahmadabad facility getting fully operational in 4Q CY15, we expect traded/imported component of the industrial bearings to decline significantly from current level of 85%. We expect import substitution of industrial bearings, to be a key driver for SKF’s margin expansion as SKF would improve its turnaround time with reduced cost. We expect EBITDAM of SKF to improve to 12.5% by CY17 (11.7% in CY14). We recommend buy with a target of Rs. 1,432, an upside of 15% in 12 months.

NRB Bearings Ltd (NRB) – Buy:

NRB Bearings Limited is (NRB) NRB was incorporated in 1965 as an Indo-French venture with Nadella and pioneered the production of needle roller bearings in India NRB provides bearings for the requirements of the mobility industry which has original equipment manufacturers (OEMs), including 2/3 wheelers, such as motor cycles, scooters, mopeds, auto rickshaws and industrial four stroke engines, passenger cars from small car hatchbacks to luxury models and utility vehicles, commercial vehicles, such as buses, farm equipment and off highway vehicles, including forklift trucks and construction equipment, railway locomotives, defense vehicles, including gun carriers and tanks. Its products include loose needle rollers, needle roller bushes and cages, ball and roller bearings and automobile components. Its subsidiaries include SNL BEARINGS LTD, NRB Bearings (Thailand) Ltd and NRB Bearings Europe GmBH. With ~70% market share, NRB is a leader in domestic needle roller bearing market worth ~Rs 440 Cr in FY15. With domestic auto industry showing signs of recovery (NRB quarterly revenue perfectly correlated with quarterly automobile production), we expect domestic revenue to grow at a CAGR of 13% through FY18. With further expansion in to new geographies, market share gains with existing customers and acquisition of new customers, we expect export revenue to grow at a CAGR of 17% till FY18 pushing up contribution of exports to total revenue to ~26% by FY18. We expect strong growth in top-line coupled with positive operating leverage to improve EBITDAM from 18.5% in FY15 to 20% in FY18. We recommend buy with a target of Rs. 179, an upside of 24% in 12 months.

Menon Bearings Ltd (MBL) - Buy:

Menon Bearings Limited (MBL) is an India-based engine bearings company. The Company is engaged in the manufacturing of auto components. The Company's products include bi-metal engine bearings, bushes and thrust washers for light and heavy automobile engines, two wheeler engines, as well as compressors for refrigerators and air conditioners, among others. It also offers aluminum die casting components. MBL’s bearing products include bearings for connecting rods, bearings for crank shafts, flanged bearings and trimetal bearings. It provides truncated bushes for connecting rods, ball indented bushes, bushes for connecting rods, cam shafts, rock shafts and rocker arms. The Company's thrust washers include washers with thrust face contours and ring type thrust washers. MBL exports its products to the United States, the United Kingdom, Italy, France, China, Mexico and Brazil, among others. With focus on quality, MBL has been able to gain share from ~12% in FY12 to ~15% in FY15. With continued improvement in market share in both domestic and overseas market and recovery in domestic automobile industry, we expect MBL’s revenue to grow at a CAGR of 12% through FY18. With improved utilizations and managements continual effort to reduce its operating cost, we expect MBL to main the margins at 25% at the minimum. We recommend buy with a target of Rs. 68, an upside of 32% in 12 months.

5

Bearings Industry

Timken India Ltd (TIL) –Buy:

Timken India Limited (TIL) was incorporated in 1987 as Tata Timken Limited (TTL), a joint venture between Tata Iron and Steel Company (TISCO) and The Timken Company, USA. It commenced commercial production at its Jamshedpur plant in March 1992. The Timken Company is a world leader in tapered roller bearings and a leading producer of quality alloy steel. Tata Steel is the world's 10th largest steel manufacturer. TISCO and TIMKEN each held 40% equity stake in the company and the public held the rest. In 1999, Timken acquired from Tata Steel its 40% stake in Tata Timken Limited. The Timken Company now holds 75% equity stake and the remaining 20% is owned by Indian Public. The name of the Company was changed to Timken India Limited on July 2, 1999. The company has sales offices in Kolkata, Delhi, Bangalore, Pune and Jamshedpur. Exports contribute ~36.5% to total revenue in FY15. Continued focus on export markets, we expect TIL’s export revenue to grow at a CAGR of 20% through FY18. Gearbox servicing business although contributing small portion (Rs 24 Cr in FY14) to the business is a high margin business. With huge scope for cross selling of the services in the vertical, we expect revenue in the segment to grow at a CAGR of 60% through FY18. TIL derives 25% of its revenues from CV & off highways segments, 25% from process industries, 25% from Railways and balance 25% from after markets & service. With diverse clients across the industries, TIL is well positioned to sail through difficult time. We recommend buy with a target of Rs. 719, an upside of 32% in 12 months

FAG Bearings Ltd (FAGB) – Not Rated:

FAG Bearings India Ltd (FAGB) is a leading player in the Indian Bearing industry. The company manufactures a very wide range of bearings conforming to the stringent international quality standards. They are leading OEM supplier to several industries including automotive, mechanical, power, cement, mining, besides the Railways, with clientele ranging from Tata Motors, Maruti, Ashok Leyland and the Indian Railways, among many others. Their manufacturing plants are located at Vadodara in Gujarat. FAGB was incorporated as Precision Bearings India Ltd in the year 1962. In the year 1993 and 1998, they became the first Indian Bearing company to achieve ISO 9001 and QS 9000 certification respectively and in the year 1999, they received ISO 14001 certification. In the year 2000, the company set up India's first production facilities to produce hub bearings. In the year 2001, the company entered a joint venture agreement with FAG Kugelfischer Georg Schaefer AG of Germany and formed FAG Roller Bearings Private Ltd for manufacture of taper roller bearings at Pune in Maharashtra. The Pune plant currently has the production capacity of 2 million tapered roller bearings of world class quality for automotive and industrial applications. We have not rated this stock.

Risk to our call

The bearing industry is highly competitive, and this competition results in significant pricing pressure for products that could affect revenues and profitability.

Weakness in domestic or global economic conditions or in any of the industries or geographic regions in which end user customers operate, as well as the cyclical nature of customers’ businesses, could adversely impact revenues growth and profitability by reducing demand and margins.

Any change in raw material prices or the availability or cost of raw materials could adversely affect results of operations and profit margins.

Warranty, recall, quality or product liability claims could materially adversely affect earnings.

Environmental laws and regulations impose substantial costs and limitations on operations. With India moving on to global standards on these issues, environmental compliance may be more costly than we expect.

SKF

SKF India Ltd. Sector Update

Bearings Rating: Buy

Date December 09, 2015 CMP (Rs.) 1,250 Target (Rs.) 1,432 Potential Upside 15% BSE Sensex 25,036 NSE Nifty 7,613

Scrip Code Bloomberg SKF IN Reuters SKFB.BO BSE Group A BSE Code 500472 NSE Symbol SKFINDIA Market Data Market Cap.(Rs. Cr) 6,592 Equity Sh. Cap. (Rs Cr) 53 52 Wk High/Low 1,540/1,171 Avg. Quarterly Volume 14,958 Face Value (Rs.) 10 Shareholding Pattern (As on 30

th Sep 2015)

FII 12.34 DII 20.03 Promoters 53.58 Public & Others 14.05 Total 100.00 Comparative Price Chart

Ravikant Sangepag

Research Analyst [email protected]

SKF India, is domestic arm of SKF Group, a leading global supplier of products, solutions and services within rolling bearings, seals, mechatronics, services and lubrication systems. Services include technical support, maintenance services and condition monitoring. Incorporated in 1961, today, with 3 manufacturing facilities located in Pune, Bangalore and Haridwar, with 11 sales offices across India and a supplier network of over 300 distributors, SKF continues to serve bearing industry for over 4 decades. SKF is the largest manufacturer of the bearings in India with ~28% market share in domestic bearing industry. With revival in both automobile and industrial activities, we expect SKF to clock revenue growth of CAGR 8% from CY14 to CY18. SKF has recently forayed in both renewable and railway segment. With new government clearly targeted to provide impetus to these industries SKF is well positioned to benefit from huge investments envisaged in these industries in medium to longer term. With Ahmadabad facility getting fully operational in 4Q CY15, we expect traded/imported component of the industrial bearings to decline significantly from current level of 85%. We expect import substitution of industrial bearings, to be a key driver for SKF’s margin expansion as SKF would improve its turnaround time with reduced cost. We expect EBITDAM of SKF to improve to 12.5% by CY17 (11.7% in CY14).

Well positioned to ride on domestic economic revival:

SKF has ~28% market share in the India Automobile and industrial segments contribute almost

equally to SKF’s total revenue. With cooling off of inflation, cut in interest rates and improving

automobile sales we believe that India is gradually moving towards high economic growth. With

clients such as Tata Motors, Maruti, Mahindra and Mahindra and Toyota, SKF is well-positioned to

benefit from the cyclical turnaround in commercial vehicle and car sales. Besides, bearings are used

across industries such as material handling, power and mining. We believe that the revival visible in

some pockets such as road building, construction and mining activities will aid SKF to clock revenue

growth of CAGR 8% from CY14 to CY18.

Railways and renewal energy to roll revenue further:

Renewable energy contributed nearly ~6% of SKF revenue in FY15. The new government at the

center is clearly targeted to provide impetus to renewable sector stronger development in wind

sector augur well for SKF. With Indian government’s intense focus, we believe India’s wind energy

installed capacity is expected to grow at a CAGR of 15% between FY15-FY22 from 22 GW to 60

GW. SKF would be key beneficiary of Indian government’s renewable energy target of 175 GW by

FY22. Growing demand for effective mass mobility solutions continues to lead to steady and long-

term development of the railway sector. The government has ambitious plans for growth and

modernization of railways. SKF has recently ventured into railway segment and is currently

supplying around ~5% of the contract size; and upon successfully meeting the criteria, SKF would

be eligible for supplying full time contracts which may fare well in near future.

.

Localization of Industrial bearings to lift margins:

Industrial bearings contribute 51% to SKF’s revenue in CY15. Almost 85% of revenue in the

segment is driven by imported/ treaded components which have lower margins compared to

localized manufacturing. The company is in process of expansion of its Ahmedabad facility which

mainly caters to industrial bearing segment (namely Railways, Mining, Renewable Energy etc.). With

Ahmadabad facility becoming fully operational in 48 CY15, we expect import substitution of industrial

bearings, to be a key driver for SKF’s margin expansion as SKF would improve its turnaround time

with reduced cost. We expect EBITDAM of SKF to improve to 12.5% by CY17 (11.7% in CY14).

Valuation & Outlook:

Apart from abovementioned factors, SKF’s market leadership position, technological backing from its parent and debt-free status are other factors that make the stock attractive. At current market price of 1,250, it trades at about 28.8x CY16E EPS of Rs 43.4. We value the company at 33x its CY16E EPS and recommend buy with a target of Rs. 1,432, an upside of 17% in 12 months.

Particulars Revenue (Cr) EBITDA (Cr) EBITDAM (%) PAT (Cr) PATM (%) EPS (Rs) P/E (x)

CY13 2,275 239 10.5 167 7.3 31.6 39.5

CY14 2,416 283 11.7 203 8.4 38.5 32.5

CY15E 2,411 253 10.5 181 7.5 34.4 36.4

CY16E 2,773 319 11.5 229 8.3 43.4 28.8

80

90

100

110

120

Nov-14 Feb-15 May-15 Aug-15 Nov-15

SKF Sensex

SKF

Story in charts Correlation with IIP and domestic automobile production:

Revenue Trend

EBITDA Trend

PAT Trend

Trend in ROE (%)

90

100

110

120

130

1Q FY11

1Q FY12

1Q FY13

1Q FY14

1Q FY15

1Q FY16

SKF IIP

90

110

130

150

170

1Q FY11

1Q FY12

1Q FY13

1Q FY14

1Q FY15

1Q FY16

SKF AUTO

2,275 2,416

2,411 2,773 3,050

2.1 6.2

(0.2)

15.0 13.0

-5

0

5

10

15

20

2,000

2,500

3,000

3,500

CY 13 CY 14 CY 15E CY 16E CY 17E

Revenue (Rs Cr) Growth (%)

239 283 253

319

381 10.5

11.7

10.5

11.5

12.5

9

10

11

12

13

200

250

300

350

400


EBITDA (Rs Cr) EBITDAM (%)

167 203

181

229

272

7.3 8.4

7.5 8.3

8.9

0

2

4

6

8

10

150

200

250

300


PAT (Rs Cr) PATM (%)

13.7 15.1

12.2

14.0 14.9

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0


Revenue expected to grow with a CAGR of 8% till CY17

PAT to grow at a CAGR of 10%

through CY17

EBITDA to grow at a CAGR of 10% through CY17

Observation of lagged quarterly IIP with quarterly revenue of SKF implies near perfect correlation between them.

ROE to stabilize at ~15% by CY17

SKF

Company Background The SKF Group is a leading global supplier of products, solutions and services within rolling

bearings, seals, mechatronics, services and lubrication systems. Services include technical support,

maintenance services, condition monitoring, asset efficiency optimization, engineering consultancy

and training. Founded in 1907, SKF has hands-on experience in over 40 industries with our

knowledge across the SKF technology platforms: bearings and units, seals, mechatronics, services

and lubrication systems. SKF employs ~49,000 employees in 140 units and 18 technical centres

across 32 countries. SKF Group reported SEK 71 billion (Rs 802 billion) and PAT of 4.8 billion (Rs

54.2 billion) in CY14.

SKF Global caters to wide range of industries (revenue breakup in CY14)

SKF's roots in India can be traced back to 1923, when a trading arm of SKF Group was set up in

Kolkatta. Since then SKF has been serving the Indian market with high quality bearings for over 3

decades. SKF India Ltd was incorporated in the year 1961 as a result of collaboration between AB

SKF, Associated Bearing Company limited and Investment Corporation of India Ltd and the first

manufacturing plant was commissioned in Pune in the year 1965.

Today, with 3 manufacturing facilities located in Pune, Bangalore and Haridwar, with 11 sales offices

across India and a supplier network of over 300 distributors, SKF continues to serve the varied

markets with reliable solutions.

SKF India revenue breakup in CY14

Client Base:

Key Management Personnel :

Key Management personnel Designation

Mr. Kamlesh C. Mehra Chairman

Mr. Shishir Joshipura Managing Director & Country Manager

Mr. Chandramowli Srinivasan Director- Finance

Mr. Sudhir Rege Director-South Asia - Industrial Markets

Mr. Anjali Byce Director-Human Resources

AM 39%

OE 61%

Auto 41%

Indus 51%

Export 8%

SKF

Financial Performance PROFIT & LOSS (Rs Cr) CASH FLOW (Rs Cr)

Particulars CY 13 CY 14 CY 15E CY 16E Particulars CY 13 CY 14 CY 15E CY 16E

Revenue 2,275 2,416 2,411 2,773 Cash from operating act. 171 236 248 248

Raw material cost 1,440 1,500 1,497 1,722 Cash from investing act. 54 10 70 101

Employee cost 207 216 215 247 Cash from financing act. (48) (61) (47) (60)

Other operating expenses 389 417 446 483 Net Change in Cash 69 165 131 88

EBITDA 239 283 253 319

Depreciation 49 54 56 62 RATIO ANALYSIS

Other Income 63 77 77 88 Particulars CY 13 CY 14 CY 15E CY 16E

EBIT 253 306 274 346 General

Interest Expenses - - - - EPS 31.6 38.5 34.4 43.4

Profit Before Tax 253 306 274 346 BVPS 241.9 268.6 294.0 326.1

Tax 86 103 92 117 ROE 13.7% 15.1% 12.2% 14.0%

PAT 167 203 181 229 WC as % of Sales 10.9% 11.6% 11.9% 10.9%

Growth

BALANCE SHEET (Rs Cr) Revenue 2.1% 6.2% -0.2% 15.0%

Particulars CY 13 CY 14 CY 15E CY 16E EBITDA -7.5% 18.4% -10.6% 26.0%

Share Capital 53 53 53 53 PAT -12.3% 21.6% -10.6% 26.3%

Reserves & Surplus 1,223 1,363 1,498 1,667 Profitability

Total Shareholder funds 1,276 1,416 1,550 1,720 EBITDA Margin 10.5% 11.7% 10.5% 11.5%

Non Current Liabilities EBIT Margin 11.1% 12.7% 11.3% 12.5%

Longterm Borrowings - - - - PAT Margin 7.3% 8.4% 7.5% 8.3%

Deferred Tax Liabilities 4 0 0 0 Stability

Other LT Liabilities - - - - Debt/Equity 0.0 0.0 0.0 0.0

Current Liabilities Current Ratio 2.6 2.8 3.2 3.2

Trade Payables 251 337 293 337 Interest Coverage NA NA NA NA

Other Current Liabilities 74 86 80 92

ST Borrowings - - - -

ST Provisions 68 45 57 65

TOTAL LIABILITIES 1,695 1,911 2,007 2,241

Non Current Assets

Net Block 376 367 370 373

CWIP 25 18 18 18

NC Investments - - - -

Current Assets

Inventories 255 293 274 315

Sundry Debtors 330 373 351 403

Cash and Bank 376 535 666 753

ST Loans and Advances 71 81 76 87

TOTAL ASSETS 1,695 1,911 2,007 2,241

NRB

NRB Bearings Ltd. Sector Update


Date December 09, 2015 CMP (Rs.) 144 Target (Rs.) 179 Potential Upside 24% BSE Sensex 25,036 NSE Nifty 7,613

Scrip Code Bloomberg NRBBR IN Reuters NBEA.BO BSE Group B BSE Code 530367 NSE Symbol NRBBEARING Market Data Market Cap.(Rs. Cr) 1,395 Equity Sh. Cap. (Rs Cr) 19 52 Wk High/Low 154/96 Avg. Quarterly Volume 86,546 Face Value (Rs.) 2 Shareholding Pattern (As on 30

th Sep 2015)


Ravikant Sangepag


NRB Bearings Limited is (NRB) NRB was incorporated in 1965 as an Indo-French venture with

Nadella and pioneered the production of needle roller bearings in India NRB provides

bearings for the requirements of the mobility industry which has original equipment

manufacturers (OEMs), including 2/3 wheelers, such as motor cycles, scooters, mopeds, auto

rickshaws and industrial four stroke engines, passenger cars from small car hatchbacks to

luxury models and utility vehicles, commercial vehicles, such as buses, farm equipment and

off highway vehicles, including forklift trucks and construction equipment, railway

locomotives, defense vehicles, including gun carriers and tanks. Its products include loose

needle rollers, needle roller bushes and cages, ball and roller bearings and automobile

components. Its subsidiaries include SNL BEARINGS LTD, NRB Bearings (Thailand) Ltd and

NRB Bearings Europe GmBH. With ~70% market share, NRB is a leader in domestic needle

roller bearing market worth ~Rs 440 Cr in FY15. With domestic auto industry showing signs

of recovery (NRB quarterly revenue perfectly correlated with quarterly automobile

production), we expect domestic revenue to grow at a CAGR of 13% through FY18. With

further expansion in to new geographies, market share gains with existing customers and

acquisition of new customers, we expect export revenue to grow at a CAGR of 17% till FY18

pushing up contribution of exports to total revenue to ~26% by FY18. We expect strong

growth in top-line coupled with positive operating leverage to improve EBITDAM from 18.5%

in FY15 to 20% in FY18.

Leader in needle roller bearing segment:

NRB is the leader in the needle bearing segment in India with ~70% market share. Needle roller

bearings constituted ~55% of NRB’s top-line in FY15. NRB work with major OEMs from the

conceptualization stage offers customized bearings this enables it to build strong relationships with

almost all major OEMs. Needle roller bearings find most of the applications in automotive industry.

With auto industry finally showing signs of recovery, needle roller bearing market is estimated to

grow to Rs. 538 Cr by FY179 (Rs 440 Cr in FY15). We expect domestic revenue of NRB to grow at a

CAGR of 13% through FY18.

Exports to drive revenue growth further:

Export contributed ~24% to top-line in FY15 (merely ~9% in FY11) registering CAGR of ~40%. In

order to reduce dependence on domestic market, NRB constantly expanded its geographical

presence and forayed into newer platforms. Today, the company exports mainly to Germany,

France, America, Japan, Iran, Sri Lanka etc. The company is targeting to enter African replacement

market segment in 2H FY16. The major clients overseas include OEMs such as ZF Friedrichshafen

AG, Getrag, Volvo, Daimler Trucks, Audi etc. With market share gains with existing customers and

acquisition of new customers, we expect export revenue to grow at a CAGR of 17% till FY18

pushing up contribution of exports to total revenue to ~26% by FY18.

Improved utilization to lift operating margins, lower CAPEX to improve return ratios :

NRB is operating at ~70% utilization level in FY15. With traction in revenue, utilization level could

improve to ~95% in FY18. We expect EBITDAM to improve from 18.5% in FY15 to 20% in FY18.

With minimal CAPEX requirement (Rs 80 Cr in FY17 & FY18) we expect NRB to generate FCFF of

Rs 47 Cr/ Rs 67 Cr in FY17/FY18 thereby reducing debt to equity ratio from 1.1x in FY15 to 0.7 in

FY18. We also expect ROE of NRB to improve from 22.5% in FY15 to 25% in FY18.


At the current price of Rs 144, NRB’s stock trades at 18.5x FY17E EPS of Rs 7.8. With strong growth in top-line, improved margins and significantly improved return ratios will help NRB to sustain valuation multiples. We value the company at 23x its FY17E EPS and recommend buy with a target of Rs. 179, an upside of 24% in 12 months.

Particulars* Revenue (Cr) EBITDA (Cr) EBITDAM (%) PAT (Cr) PATM (%) EPS (Rs) P/E (x)

FY14 607 104 17.1 33 5.4 3.4 42.3

FY15 670 124 18.5 53 7.9 5.5 26.2

FY16E 737 125 17.0 52 7.1 5.4 26.8

FY17E 855 162 19.0 75 8.8 7.8 18.5

60

80

100

120

140

Nov-14 Mar-15 Jul-15 Nov-15

NRB Sensex

NRB


Export revenue and its contribution to total sales

Revenue Trend

EBITDA Trend

Trend in ROE (%)

90

110

130

150

170

190

1Q FY11

1Q FY12

1Q FY13

1Q FY14

1Q FY15

1Q FY16

NRB IIP

90

110

130

150

170

190

1Q FY11

1Q FY12

1Q FY13

1Q FY14

1Q FY15

1Q FY16

NRB AUTO

123 136 155 170

204

245 21.5

23.3 24.1 24.1 24.9

25.7

18

20

22

24

26

80

130

180

230

280

FY 13 FY 14 FY 15 FY 16E FY 17E FY 18E

Exports (Rs Cr) Contribution (%)

592 607 670

737 855

992 5.7

2.7

10.3 10.0

15.9 16.0

0

5

10

15

20

500

600

700

800

900

1,000

1,100



101 104 124 125 162

198 17.0 17.1

18.5

17.0

19.0

20.0

15

16

17

18

19

20

21

50

100

150

200

250



23.8

15.8

22.5

19.1

23.6

25.2

10

12

14

16

18

20

22

24

26


Export is expected to grow at a CAGR of 17% from FY15 to FY18 and contribution of export to sales is expected to reach 25.7% compared to current 24%

With EBITDAM improving from

18.5% in FY15 to 20% in FY18,

EBITDA is expected to grow at a

CAGR of 17% through FY18

Total revenue is expected to grow at a CAGR of 14% through FY15-FY18

Correlation of quarterly revenue of NRB with IIP and Domestic automobile production stands at

0.6 and 1.0 respectively

With minimal CAPEX requirement

and better utilization, ROE and D/E

ratios are expected to reach 25.2

and 0.7 respectively.

NRB

Company Background NRB Bearings Limited is (NRB) is India's largest needle and cylindrical roller bearings producer

headquartered in Mumbai. NRB was incorporated in 1965 as an Indo-French venture with Nadella

and pioneered the production of needle roller bearings in India NRB provides bearings for the

requirements of the mobility industry which has original equipment manufacturers (OEMs), including

2/3 wheelers, such as motor cycles, scooters, mopeds, auto rickshaws and industrial four stroke

engines, passenger cars from small car hatchbacks to luxury models and utility vehicles, commercial

vehicles, such as buses, farm equipment and off highway vehicles, including forklift trucks and

construction equipment, railway locomotives, defense vehicles, including gun carriers and tanks. Its

products include loose needle rollers, needle roller bushes and cages, ball and roller bearings and

automobile components. Its subsidiaries include SNL BEARINGS LTD, NRB Bearings (Thailand) Ltd

and NRB Bearings Europe GmBH. Founded in 1965, NRB was the first company to manufacture

needle roller bearings in India. Today, over 90% of vehicles on Indian roads run on NRB parts. NRB

is the leader in the needle roller bearings segment in India with ~70% market share. With

customized offerings and a pure play on the mobility segment, NRB enjoys a sticky clientele across

all leading OEMs.

SNL Bearings Limited, formerly known as Shriram Needle Bearing Industries Limited, was

incorporated in 1979 and is based in Mumbai. NRB holds 73.45% stake in SNL. The company

manufactures, sells, and exports needle roller bearings and special purpose machines and tools.

The company provides a range of antifriction bearings, including ball bearings; and tapered,

cylindrical, needle, spherical, thrust, and other special application roller bearings. SNL Bearings

offers its products primarily to the automobiles, general engineering, railways, and electrical

equipment industries. The company has operations in India, the United States, Europe and the

United Kingdom. In FY15, SNL has reported PAT of Rs.4.55 Cr (Rs.3.39 Cr in FY14), on account of

higher volumes and improved cost competitiveness. We expect SNL to further capitalize on growth,

enhance profitability in years to come.

NRB Bearings (Thailand) Ltd, a wholly owned subsidiary, has increased its sales by 30% in FY15 to

Rs 22.6 Cr. The Company has turned EBITDA positive for the year and the loss has been lower at

Rs 3 Cr in FY15. NRB Bearings Europe GmbH, a wholly owned subsidiary was set up during FY15

in view of increasing exports to Europe. The Company provides marketing and customer support

services.



Mr. Trilochan Sahany Chairman

Mrs. Harshbeena Sahany Zaveri Managing Director & President

Mr. Satish Rangani Executive Director & Company Secretary

Ms. Tanushree Bagrodia Chief Financial Officer & Vice President-IT

NRB is the largest needle roller bearing manufacturer in the

country with market share of ~70%

NRB

FINANCIAL PERFORMANCE PROFIT & LOSS (Rs Cr) CASH FLOW (Rs Cr)

Particulars FY14 FY15 FY16E FY17E Particulars FY14 FY15 FY16E FY17E

Revenue 607 670 737 855 Cash from operating act. 72 59 93 104

Raw material cost 234 252 277 321 Cash from investing act. 70 (12) 44 46

Employee cost 101 112 123 143 Cash from financing act. 1 (14) (63) (49)

Other operating expenses 169 183 212 229 Net Change in Cash 2 57 (14) 9

EBITDA 104 124 125 162


Other Income 3 3 4 4 Particulars FY14 FY15 FY16E FY17E

EBIT 71 96 96 130 General

Interest Expenses 19 18 17 16 EPS 3.4 5.5 5.4 7.8


Tax 18 24 26 37 ROE 15.8% 22.5% 19.1% 23.6%

PAT 33 53 52 75 WC as % of Sales 34.5% 34.5% 34.0% 32.1%

Growth

BALANCE SHEET (Rs Cr) Revenue 2.7% 10.3% 10.0% 15.9%

Particulars FY14 FY15 FY16E FY17E EBITDA 3.2% 19.2% 1.1% 29.6%

Share Capital 19 19 19 19 PAT -30.1% 61.3% -2.1% 44.6%

Reserves & Surplus 200 235 273 328 Profitability

Total Shareholder funds 219 254 292 347 EBITDA Margin 17.1% 18.5% 17.0% 19.0%


Longterm Borrowings 97 101 50 20 PAT Margin 5.4% 7.9% 7.1% 8.8%


Other LT Liabilities 8 8 9 10 Debt/Equity 1.3 1.1 0.9 0.7


Trade Payables 73 89 89 103 Interest Coverage 3.7 5.3 5.5 8.0


ST Borrowings 179 185 200 232


TOTAL LIABILITIES 677 735 748 835

Non Current Assets

Net Block 233 258 265 268

CWIP 38 4 4 4

NC Investments 0 0 0 0

Current Assets



Cash and Bank 6 28 14 23


TOTAL ASSETS 677 735 748 835

MBL

Menon Bearings Ltd. Sector Update



Scrip Code Bloomberg MEN IN Reuters MENO.BO BSE Group B BSE Code 523828 NSE Symbol MENONBE Market Data Market Cap.(Rs. Cr) 236 Equity Sh. Cap. (Rs Cr) 5 52 Wk High/Low 65/9 Avg. Quarterly Volume 35,207 Face Value (Rs.) 1 Shareholding Pattern (As on 30

th Sep 2015)


Ravikant Sangepag


Menon Bearings Limited (MBL) is an India-based engine bearings company. The Company is engaged in the manufacturing of auto components. The Company's products include bi-metal engine bearings, bushes and thrust washers for light and heavy automobile engines, two wheeler engines, as well as compressors for refrigerators and air conditioners, among others. It also offers aluminum die casting components. MBL’s bearing products include bearings for connecting rods, bearings for crank shafts, flanged bearings and trimetal bearings. It provides truncated bushes for connecting rods, ball indented bushes, bushes for connecting rods, cam shafts, rock shafts and rocker arms. The Company's thrust washers include washers with thrust face contours and ring type thrust washers. MBL exports its products to the United States, the United Kingdom, Italy, France, China, Mexico and Brazil, among others. With focus on quality, MBL has been able to gain share from ~12% in FY12 to ~15% in FY15. With continued improvement in market share in both domestic and overseas market and recovery in domestic automobile industry, we expect MBL’s revenue to grow at a CAGR of 12% through FY18. With improved utilizations and managements continual effort to reduce its operating cost, we expect MBL to main the margins at 25% at the minimum.

Niche player with strong moat around the business to continue gaining market share:

MBL, with over two decades of history in bimetal bearing industry is largest with market share of

~18% in FY15 (~12% in FY12). The MBL brand enjoys strong equity among leading OEM`s all over

the world as the preferred OE supplier. MBL's quality systems are TS-16949:2002 & MBL has been

awarded "Ship to Use” certification by major OEMs. With focus on quality, MBL has been able to

gain share of the business from clients (Tata Motors- 40%/60% in FY12/FY15, Cummins India-

50%/60% in FY12/FY15, John Deere- 80%/100% in FY12/FY15). With recovery in domestic

automobile industry and improving market share, we expect MBL’s domestic revenue to grow at a

CAGR of 12% through FY18.

Margins to sustain at current elevated levels:

On the back of positive operating leverage, stringent cost control and daily monitoring of contribution

margins have helped MBL to improve margins from ~15% in FY13 to ~22% in FY15. With their

continual effort, MBL’s management is confident to reduce its operating cost further. MBL currently

has capacity/utilization of 90 tonnes a month/~45% and 33 Lac units a month/~72% in Aluminum

die-casting and bearing segments respectively. With continued traction in volume, we expect

significant improvement in utilization in FY18 improving profitability further. While commodity prices

are expected to cool down further, MBL may face pressure on its realization in the times to come.

We expect MBL to main the margins at 25% at the minimum.

Export s to add in revenue growth and margins further:

Exports contributed ~30% to MBL’s revenue in FY15. Key international markets for MBL include

China, Japan, USA, Europe, South Africa and Ukraine. Margins in overseas market are ~15% higher

than those in domestic market. Complying with international standards in manufacturing critical

engine components, MBL has strong relations with reputed OEM’s. MBL recently secured an export

order of USD 4 million which will be on ongoing basis. With focus on export market, we expect

MBL’s export revenue to grow at a CAGR of 20% through FY18.

Diversified and huge client base to check variability in growth in longer run:

MBLs client list figures more than 100 global OEM’s across industries and continents. Top 5 clients

(Daido Metals, Tata Motors, Tata Cummins, John Deere and FM PBW Bearings Pvt Ltd.) contribute

merely 20% to MBL’s top-line. With diversified and huge client base, we expect MBL to remain

relatively isolated from adverse changes in competitive scenario in underlying industries.


At the current price of Rs 51, MBL’s stock trades at 12.1x FY17E EPS of Rs 4.2. With continued dominance in bimetal bearing industry and sustained margins, we expect uptrend in MBL’s stock to continue. We value the company at 16x its FY17E EPS and recommend buy with a target of Rs. 68, an upside of 32% in 12 months.

Particulars* Revenue (Cr) EBITDA (Cr) EBITDAM (%) PAT (Cr) PATM (%) EPS (Rs) P/E (x)

FY14 87 15 17.7 6 7.1 1.3 38.5

FY15 103 23 21.8 12 11.2 2.5 20.6

FY16E 122 29 23.5 16 12.8 3.3 15.2

FY17E 144 35 24.5 20 13.7 4.2 12.1

60

110

160

210

260


MBL Sensex

MBL


Revenue Trend

EBITDA Trend

PAT Trend

Trend in ROE (%)

90

110

130

150

170

1Q FY11

1Q FY12

1Q FY13

1Q FY14

1Q FY15

1Q FY16

Menon IIP

90

110

130

150

170

1Q FY11

1Q FY12

1Q FY13

1Q FY14

1Q FY15

1Q FY16

Menon AUTO

83 87

103 122

144 170 5.7 4.4

18.9 18.0 18.0 18.0

0

5

10

15

20

25

0

50

100

150

200



13 15 23 29 35

43

15.3 17.7 21.8

23.5 24.5 25.5

0

5

10

15

20

25

30

0

10

20

30

40

50



4 6 12

16

20 25

4.4 7.1

11.2 12.8 13.7

14.6

0

5

10

15

20

0

5

10

15

20

25

30



11.2

17.9

29.3 32.4 32.7 32.9

0

5

10

15

20

25

30

35


Revenue expected to grow with a CAGR of 18% till FY18


through FY18

EBITDA to grow at a CAGR of 24% through FY18

Correlation of quarterly revenue of MBL with IIP and Domestic automobile production stands at


ROE is expected to improve from

current ~30% to ~33% in FY18

MBL

Company Background Menon Bearings Limited is an India-based engine bearings company. The Company is engaged in

the manufacturing of auto components. The Company's products include bi-metal engine bearings,

bushes and thrust washers for light and heavy automobile engines, two wheeler engines, as well as

compressors for refrigerators and air conditioners, among others. It also offers aluminum die casting

components. The Company's bearing products include bearings for connecting rods, bearings for

crank shafts, flanged bearings and trimetal bearings. It provides truncated bushes for connecting

rods, ball indented bushes, bushes for connecting rods, cam shafts, rock shafts and rocker arms.

The Company's thrust washers include washers with thrust face contours and ring type thrust

washers. The Company exports its products to the United States, the United Kingdom, Italy, France,

China, Mexico and Brazil, among others.

MBL has been exporting 30% of production capacity & with growth in export by more than 25 % per

annum. The MBL brand enjoys strong equity among leading OEM`s all over the world as the

preferred OE supplier. MBL's quality systems are TS-16949:2002& MBL has been awarded "Ship to

Use” certification by major OEMs.

Client Base:

MBL is a company promoted by the Flagship of Menon Group, the multi-product, high end critical

auto components group with 9 companies in its fold, & globally positioned with business activities

spanning 24 countries around the globe exporting 35 % of its production. Menon Group of

Companies includes :

MENON BEARINGS LTD.

Menon & Menon Ltd.

Menon Pistons Ltd.

Menon Pistons Rings Ltd.

Menon Exports

Menon Metalliks Pvt. Ltd.

Menon Automobiles.

Menon Alkop



Mr. Ram Menon Chairman

Mr. R. D. Dixit Vice Chairman & Managing Director

Mr. Nitin Menon Joint Managing Director

Mr. Sachin Menon Director

Mr. Arun Aradhye CFO

India 69%

Export 31%

Bearings 64%

Die-casting

26%

Bearing Strips 10%

MBL is the largest bimetal bearing manufacturer in the country

MBL

Financial Performance PROFIT & LOSS (Rs Cr) CASH FLOW (Rs Cr)


Revenue 87 103 122 144 Cash from operating act. 11 11 22 25

Raw material cost 33 39 46 54 Cash from investing act. 4 2 7 7



EBITDA 15 23 29 35






Tax 3 5 7 9 ROE 17.9% 29.3% 32.4% 32.7%

PAT 6 12 16 20 WC as % of Sales 17.3% 15.1% 14.7% 14.0%

Growth


Particulars FY14 FY15 FY16E FY17E EBITDA 20.6% 46.6% 27.0% 23.0%

Share Capital 5 5 5 5 PAT 67.0% 86.9% 35.2% 26.2%




Longterm Borrowings 6 4 4 - PAT Margin 7.1% 11.2% 12.8% 13.7%


Other LT Liabilities - - - - Debt/Equity 0.5 0.4 0.4 0.3







Non Current Assets

Net Block 38 36 38 40

CWIP 1 0 0 0


Current Assets




ST Loans and Advances - - - -

TOTAL ASSETS 74 78 94 110

TIL

Timken India Ltd. Initiating Coverage



Scrip Code Bloomberg TMKN.IN Reuters TIMK.BO BSE Group B BSE Code 522113 NSE Symbol TIMKEN Market Data Market Cap.(Rs. Cr) 3,713 Equity Sh. Cap. (Rs Cr) 68 52 Wk High/Low 668/448 Avg. Quarterly Volume 21,023 Face Value (Rs.) 10 Shareholding Pattern (As on 30

th Sep 2015)


Ravikant Sangepag


Timken India Limited (TIL) was incorporated in 1987 as Tata Timken Limited (TTL), a joint venture between Tata Iron and Steel Company (TISCO) and The Timken Company, USA. It commenced commercial production at its Jamshedpur plant in March 1992. The Timken Company is a world leader in tapered roller bearings and a leading producer of quality alloy steel. Tata Steel is the world's 10th largest steel manufacturer. TISCO and TIMKEN each held 40% equity stake in the company and the public held the rest. In 1999, Timken acquired from Tata Steel its 40% stake in Tata Timken Limited. The Timken Company now holds 75% equity stake and the remaining 20% is owned by Indian Public. The name of the Company was changed to Timken India Limited on July 2, 1999. The company has sales offices in Kolkata, Delhi, Bangalore, Pune and Jamshedpur. Exports contribute ~36.5% to total revenue in FY15. Continued focus on export markets, we expect TIL’s export revenue to grow at a CAGR of 20% through FY18. Gearbox servicing business although contributing small portion (Rs 24Cr in FY14) to the business is a high margin business. With huge scope for cross selling of the services in the vertical, we expect revenue in the segment to grow at a CAGR of 60% through FY18. TIL derives 25% of its revenues from CV & off highways segments, 25% from process industries, 25% from Railways and balance 25% from after markets & service. With diverse clients across the industries, TIL is well positioned to sail through difficult time. Exports to continue driving revenue growth:

Export revenue of TIL has grown at a CAGR of 24% from FY11 to FY15. Contribution of the revenue

has increased to 36.5% in FY15 compared to 30% in FY11. India contributes ~3% to Timken Global

top-line. TIL has been key supplier to its group companies overseas as it’s made in India product

continues to be competitive compared to other geographies. Parent is focused to make TiIL as a key

manufacturing hub to cater burgeoning demand in Asia. Asia currently contributes ~13% to Timken

Global top-line with 25% of total employees employed in the region. On the back of continued focus

on export markets, we expect TIL’s export revenue to grow at a CAGR of 20% through FY17.

Traction in service business to support revenue growth and margins as well:

Backed up with Philadelphia Gears knowhow and with investment of Rs 15 Cr, TIL set up industrial

gearbox service facility in Raipur in FY14. TIl generated revenue of ~Rs 24 Cr. In FY14. Industrial

gearbox servicing market currently dominated by unorganized players. The estimated size of the

market is ~Rs 2500 Cr wherein TIL is targeting command up to 15% market share over the longer

term. With increased share in service business, we expect revenue from the segment to grow at a

CAGR of ~60% through FY18.

Diversified revenue drivers :

TIL derives 25% of its revenues from CV & off highways segments, 25% from process industries,

25% from Railways and balance 25% from after markets & service. With increased contribution from

gearbox service business, portfolio is expected to diversify further. With diverse clients across the

industries, TIL is well positioned to sail through difficult time.


At the current price of Rs 546, TIL’s stock trades at 30.4x FY17E EPS of Rs 18. TIL trades at premium to its peers like SKF (P/E- 28.8) due to its higher growth of 18/%/23% in revenue/PAT compared to 8%/10% of SKF. With continued outpace in growth in both top-line and bottom-line, we expect TIL to trade at premium to its peers in next couple of years. We value the company at 40x its FY17E EPS and recommend buy with a target of Rs. 719, an upside of 32% in 12 months.


FY14 721 72 9.9 45 6.2 6.6 83.0

FY15 926 134 14.4 81 8.7 11.9 46.0

FY16E 1,092 158 14.4 99 9.1 14.6 37.4

FY17E 1,277 191 15.0 122 9.6 18.0 30.4

60

80

100

120

140

160


TIL Sensex

TIL


Revenue Trend

EBITDA Trend

PAT Trend

Trend in ROE (%)

90

110

130

150

170

1Q FY11

1Q FY12

1Q FY13

1Q FY14

1Q FY15

1Q FY16

Menon IIP

90

110

130

150

170

1Q FY11

1Q FY12

1Q FY13

1Q FY14

1Q FY15

1Q FY16

Menon AUTO

689 721 926

1,092 1,277

1,493

3.6 4.8

28.4

18.0 16.9 16.9

0

5

10

15

20

25

30

0

500

1,000

1,500

2,000



73 72 134

158 191

231

10.7 9.9

14.4 14.4 15.0

15.5

0

5

10

15

20

50

100

150

200

250



44 45 81

99 122

149

6.4 6.2

8.7 9.1 9.6 10.0

0

2

4

6

8

10

12

30

80

130

180



13.0 12.4

19.7 20.9 21.9 22.7

0

5

10

15

20

25


Revenue expected to grow with a CAGR of 17% till FY18


through FY18

EBITDA to grow at a CAGR of 20% through FY18

Correlation of quarterly revenue of TIL with IIP and Domestic automobile production stands at


ROE is expected to improve from

~20% in FY15 to ~23% in FY18

TIL

Company Background

The Timken Company (holding company), incorporated on December 16, 1904, engineers,

manufactures and markets bearings, transmissions, gearboxes, chain and related products and

offers a spectrum of power system rebuild and repair services around the world. The Company

operates through two segments: Mobile Industries, which offers bearings, seals, lubrication devices

and systems, as well as power transmission components, engineered chain, augers and related

products and maintenance services, and Process Industries, which provides industrial bearings and

assemblies, power transmission components such as gears and gearboxes, couplings, seals,

lubricants, chains and related products and services. The Company’s industrial brands include

Timken, Fafnir, Philadelphia Gear, Drives and Interlube. As of December 31, 2014, the Company's

global footprint consisted of 61 manufacturing facilities/service centers, 12 technology and

engineering centers and 23 distribution centers and warehouses. Timken operates in around 28

countries and territories around the globe. The Company sells products and services to the following

market sectors: industrial equipment, construction, agriculture, rail, aerospace and defense,

automotive, heavy truck and energy.

Timken India Limited (TIL) was incorporated in 1987 as Tata Timken Limited (TTL), a joint venture

between Tata Iron and Steel Company (TISCO) and The Timken Company, USA. It commenced

commercial production at its Jamshedpur plant in March 1992. The Timken Company is a world

leader in tapered roller bearings and a leading producer of quality alloy steel.Tata Steel is the world's

10th largest steel manufacturer.TISCO and TIMKEN each held 40% equity stake in the company

and the public held the rest. In 1999, Timken acquired from Tata Steel its 40% stake in Tata Timken

Limited. The Timken Company now holds 75% equity stake and the remaining 20% is owned by

Indian Public. The name of the Company was changed to Timken India Limited on July 2, 1999. The

company has sales offices in Kolkata, Delhi, Bangalore, Pune and Jamshedpur.

Manufacturing facility at Jamshedpur largely caters to medium and heavy trucks, off-highway

equipments, Railways markets and exports. The Company meets the demand for other types of

bearings viz., large size tapered roller bearings, spherical roller bearings, cylindrical roller bearings

and specialty ball bearings by sourcing these from other Timken Company plants globally. Apart

from bearings, TIL offers adjacent products related to the Mechanical Power Transmission like

coupling, housed units. Apart from bearing, TIL facility in Raipur with Philadelphia Gears capability

focuses on the industrial gearbox repair, journal rebuilding and chock repairs.



Mr. Sanjay Koul Chairman & Managing Director

Mr. Avishrant Keshava Whole Time Director & CFO

Mr. P S Dasgupta Independent Director

Mr. Jai S Pathak Independent Director

Mr. R Ramesh Whole Time Director

Domestic 63%

Export 37%

Revenue by Geography

CV & Offroad

25%

Process industry

25%

Railways 25%

Aftermarket &

Service 25%

Revenue by Segment

TIL



Revenue 721 926 1,092 1,277 Cash from operating act. 48 61 96 94

Raw material cost 447 553 652 762 Cash from investing act. 37 36 18 24



EBITDA 72 134 158 191






Tax 21 42 49 60 ROE 12.4% 19.7% 20.9% 21.9%

PAT 45 81 99 122 WC as % of Sales 27.2% 24.8% 23.8% 23.0%

Growth


Particulars FY14 FY15 FY16E FY17E EBITDA -2.6% 86.8% 18.0% 21.4%

Share Capital 68 68 68 68 PAT 1.2% 80.4% 22.9% 23.2%





Deferred Tax Liabilities - - - - Stability








Non Current Assets

Net Block 97 107 110 113

CWIP 26 27 27 27


Current Assets





TOTAL ASSETS 500 585 668 784

FAGB

FAG Bearings Ltd. Sector Update

Bearings Rating: Not Rated

Date December 09, 2015 CMP (Rs.) 4,020 Target (Rs.) - Potential Upside - BSE Sensex 25,036 NSE Nifty 7,613

Scrip Code Bloomberg FAG IN Reuters FAGB.BO BSE Group B BSE Code 505790 NSE Symbol FAGBEARING Market Data Market Cap.(Rs. Cr) 6,680 Equity Sh. Cap. (Rs Cr) 17 52 Wk High/Low 4,890/3,100 Avg. Quarterly Volume 30,725 Face Value (Rs.) 10 Shareholding Pattern (As on 30

th June 2015)


Ravikant Sangepag


FAG Bearings India Ltd (FAGB) is a leading player in the Indian Bearing industry. The

company manufactures a very wide range of bearings conforming to the stringent

international quality standards. They are leading OEM supplier to several industries including

automotive, mechanical, power, cement, mining, besides the Railways, with clientele ranging

from Tata Motors, Maruti, Ashok Leyland and the Indian Railways, among many others. Their

manufacturing plants are located at Vadodara in Gujarat. FAGB was incorporated as

Precision Bearings India Ltd in the year 1962. In the year 1993 and 1998, they became the first

Indian Bearing company to achieve ISO 9001 and QS 9000 certification respectively and in

the year 1999, they received ISO 14001 certification. In the year 2000, the company set up

India's first production facilities to produce hub bearings. In the year 2001, the company

entered a joint venture agreement with FAG Kugelfischer Georg Schaefer AG of Germany and

formed FAG Roller Bearings Private Ltd for manufacture of taper roller bearings at Pune in

Maharashtra. The Pune plant currently has the production capacity of 2 million tapered roller

bearings of world class quality for automotive and industrial applications.

FAGB has its presence in automotive and across all core industrial segments. FAGB is No.1 supplier

of hub bearings to the Indian Passenger Car Industry. FAGB caters to all major industry segments

including: Construction Machinery, Electrical Engineering, Fluid Technology, Conveying equipment,

Industrial Gears, Mining & Cement, Power Generation, Agricultural Engineering, Steel plants,

Motorcycles, Textile Machinery, Machine tools, Wind power, Pulp and Paper and so on. Proximity to

the customer and intimate knowledge of individual requirements has enabled FAG India to provide

innovative solutions on time and within budgets.

Since inception of FAGB, the Indian Railways has been an important customer and the company is

recognized as the most reliable source for critical applications viz. Traction Motors, Journal Roller

Bearings, Transmission, Auxiliary Motors, etc. Just on track with the Railways.

Export revenue contributed Rs 292 Cr (18%) to top-line in CY14. FAG Bearings from the Indian plant

are exported to Europe (52%), Americas (10%) and Asia Pacific (38%). International customers

using FAG India products include: Daimler Chrysler, Volvo, Volkswagen, Renault, Voith, Otis and

General Dynamics.

Schaeffler – the MNC connection

The Schaeffler Group, with its three strong brands INA, FAG and Luk is a leading manufacturer of

rolling bearings and linear products worldwide as well as renowned supplier to the automotive

industry. The group generated sales of approximately EUR 12.1 billion in 2014. With around 84,000

employees, Schaeffler is one of the world’s largest family companies and, with approximately 170

locations in 50 countries, has a worldwide network of manufacturing locations, research and

development facilities, and sales companies. The Schaeffler Group operates mainly in two verticals,

Automotive Division and Industrial Division.

Access to Schaeffler’s huge technology pool and patents :

Schaeffler Group with over more than 132 years has built the competence in application

engineering, advisory work and production technology with largest product portfolios worldwide. This

history set the standard and has resulted in a strong focus on R&D in all branches of the Schaeffler

Group, giving rise to more than 1000 patents per year. With access to Huge technological prowess,

FAGB is well positioned to grow in adverse competitive scenarios in the vicinity it operates.

Valuation:

Revenue and PAT of FAGB has grown at a CAGR of 12% and 6% through CY10 to CY14 respectively. At current market price of 4,020, it trades at about 43.7x CY14 EPS of Rs 92. This is at a premium to its peer SKF India which trades at about 32.5x CY14 EPS.


CY11 1,309 254 19.4 176 13.4 105.9 10.0

CY12 1,447 221 15.3 159 11.0 95.8 17.9

CY13 1,402 184 13.1 122 8.7 73.3 22.3

CY14 1,632 242 14.8 153 9.4 92.0 44.1

60

80

100

120

140

160


FAGB Sensex

FAGB


Particulars CY 11 CY 12 CY 13 CY 14 Particulars CY 11 CY 12 CY 13 CY 14

Revenue 1,309 1,447 1,402 1,632 Cash from operating act. 172 112 210 67

Raw material cost 757 908 897 997 Cash from investing act. 228 205 8 (63)

Employee cost 101 113 119 138 Cash from financing act. 2 (3) (3) (25)

Other operating expenses 1,054 1,226 1,218 1,390 Net Change in Cash (55) (95) 199 105

EBITDA 254 221 184 242


Other Income 31 45 46 41 Particulars CY 11 CY 12 CY 13 CY 14

EBIT 263 235 187 234 General



Tax 85 74 64 79 ROE 27.0% 19.8% 13.0% 14.6%

PAT 176 159 122 153 WC as % of Sales 11.6% 14.1% 15.7% 16.3%

Growth

BALANCE SHEET (Rs Cr) Revenue 25.8% 10.6% -3.1% 16.4%

Particulars CY 11 CY 12 CY 13 CY 14 EBITDA 43.3% -13.2% -16.7% 31.7%

Share Capital 17 17 17 17 PAT 44.8% -9.5% -23.5% 25.5%

Reserves & Surplus 713 863 973 1,091 Profitability

Total Shareholder funds 730 880 990 1,107 EBITDA Margin 19.4% 15.3% 13.1% 14.8%








ST Borrowings - - - -


TOTAL LIABILITIES 997 1,144 1,333 1,434

Non Current Assets

Net Block 178 279 399 370

CWIP 57 114 13 20

NC Investments - 4 4 4

Current Assets



Cash and Bank 233 195 238 329


TOTAL ASSETS 997 1,144 1,333 1,434

DISCLOSURES/ APPENDIX

I. ANALYST CERTIFICATION I, Ravikant Sangepag, hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report, (2) No part of our compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report by Systematix Shares & Stocks (I) Limited or its Group/associates companies. (3) have taken reasonable care to achieve and maintain independence and objectivity in making any recommendations.

Disclosure of Interest Statement Response

Analysts holding in the stock No

Served as an officer, director or employee No

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company(ies) covered in this report, in the past twelve months. 5. The Research Analyst, SSSIL or its associates have not managed or co-managed in the previous twelve months, a private or public offering of securities for the company (ies) covered in this report. 6. SSSIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party, in connection with the research report. 7. The Research Analyst has not served as an Officer, Director or employee of the company (ies) covered in the Research report. 8. The Research Analyst and SSSIL has not been engaged in market making activity for the company(ies) covered in the Research report. 9. Details SSSIL, Research Analyst and its associates pertaining to the companies covered in the Research report:

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