Report Date: July 18, 2008.
CMP – Rs. 68/-
Target Price – Rs. 100/-
Mkt. Cap. Rs. 78.5 crore
Investment Rationale
Ø ABC, leading supplier of cylindrical roller & tapered roller bearings to commercial vehicles and tractor segment, has put up an encouraging performance in Q1 FY09. Net Sales grew by 25.8% to Rs. 45.28 crore mainly led by volume growth. Despite sharp spurt in steel prices (major raw material), company was able to almost maintain its OPM% at 21.6% (22%) due to operational efficiencies. Interest cost was substantially higher at Rs.2.24 crore on account of exchange loss of Rs.1.32 crore arising on Foreign Currency Loan/Credit availed (gain of Rs.26 lakh in Q1 FY08).
After providing for higher interest cost, PBT (before extraordinary items) was up by 13.9% to Rs.6.72 crore. In absence of any extraordinary expenses in Q1 FY09 (Rs.1.02 crore on account of VRS in Q1 FY08), PAT rose by 33% to Rs.4.15 crore.
With a view to reduce its dependence on CV and tractor segment and derisk its business, ABCL has initiated a varietyof measures.
1. Diversification into industrial bearings and expansion of product range: Company has decided to go for industrial bearings, which is small in volume, large in size and more profitable than automotive bearings. Company will also manufacture slew bearings which have an application in Windmill, Cement plant and steel mills. It has signed technical collaboration and will house facility in existing vacant structure. Production is expected to start by early FY 2010. Company is also planning to enter into railway bearings.
2. Focus on exports: ABCL also plans to increase its presence in international markets and has been able to make some breakthrough in England market. Currently, exports constitutes negligible portion of its total revenues. However, company plans to increase its share of exports to 20% of total revenues in future.
3. Strengthening its Aftermarket (AM) sales: AM accounts for only 12-15% of ABCL’s revenue and company aims to increasing the same in next few years.
Ø In next 3 years company is looking for revenue of 60% from Auto bearings (larger share of exports and after market) and others 40% (that includes industry and slewing bearings).
Ø Company has entered into 25:75 JV with NSK Japan to form NSK-ABC Bearings Ltd. (NABL). The plant located at Chennai was inaugurated on February 2008 and will manufacture bearings to cater to the automobile industry. This JV will broaden ABCL’s existing product portfolio with addition of HUB bearings (where value addition is high) and bearings for transmission & magnetic clutches. The JV will provide new opportunities to increase sales to company’s
existing customers for those bearings, which are not manufactured by ABCL. Company would also be able to offer a wide range of products and services to OEMs in India.
Ø Outlook of CV segment appears to be positive going forward. Moreover, export of assemblies from India is expected to grow substantially which will help the bearings industry. Industrial bearings demand is also expected to be strong which will augur well for the company. In addition, ABCL’s de-risking strategy and expanding product range for automotive and industrial growth will drive growth in the future.
Valuation
Ø In view of above mentioned factors, company is expected to grow topline @ CAGR of 15% (+) and bottomline @ CAGR of 22% (+) over next few years. However, rapid and unabated increase in steel prices remain a cause of concern.
At CMP of Rs.68, the share is trading at 3.9 times FY 2009 expected EPS of Rs 17.5 and 3.2 times FY 2010 expected EPS of Rs 21/-. In view of good future prospects, we recommend to “BUY” the share at current price.
