Riding high on auto demand

Updated: Apr 30 2006, 05:30am hrs
Bearing is the most critical part prominently used in automobiles and industrial engineering sectors. The sustained improvement in the production of two-wheelers and heavy commercial vehicles has augured well for the Indian bearing industry.

Company perspective

NRB Bearings Ltd is the pioneer in the manufacturing of needle roller bearings in India and manufactures over 600 types of bearings. It is the only domestic player to manufacture the entire range of bearings: cylindrical roller, spherical roller, tapered roller and ball. The company has a strong presence in the automobile sector. The sector comprises about 90% of its turnover. The rest flows from the industrial sector and exports.

The company has a leadership position in the needle roller bearing markets in India with about 70% market share. In the industrial segment, it caters to textile machinery, electricals, switchgear, material handling and hand tools industry. In certain bearing types, it is the sole supplier to auto producers. Some of its original equipment clientele includes Tata Engineering, Ashok Leyland, Maruti Udyog and Bajaj Auto.

Industry outlook

The Indian component industry has come a long way, with the output growing from $4,470 million in the year 2001-02 to $8,700 million in the year 2004-05, while exports have gone up from $578 million to $1,400 million for the same period. The global needle roller bearings market is estimated at $2 billion.

Financials

During 2001-05, the net sale of the company has grown at a CAGR of 16.35% whereas the net profit has grown at a CAGR of 36.61%. For the nine months ended December 2005, turnover at Rs 186.05 crore grew by 19.38% over corresponding period last year. Operating profit grew by 24.88 % at Rs 48.69 crore from Rs 38.99 crore.

The company has registered a net profit growth of 32.33% at Rs 29.95 crore as compared to Rs 19.61 crore posted in the corresponding nine months last year. Operating margins and net profit margins stand at 14.18% and 22.50% respectively. Despite the rise in steel prices, and pricing pressure from OEM, the company enjoys highest margins in the industry.

Considering the nine-month growth, for the FY05-06, net sales of the company is expected to grow by 18-19%, while net profit is expected to grow at 30%.

Key developments

The company, over the next two years, will be investing close to Rs 100 crore for expanding its cylindrical bearings capacity from 1.5 million to 4 million and needle roller from 20 million to 35 million.

There would be around 60% addition in the current capacity of the company which will start reflecting on the revenue for FY07-08. NRB, whose largest customer is top commercial vehicle maker Tata Motors Ltd, is already growing at double-digit.

Besides the demand for fresh products, NRB generates almost 25% of its total revenue from replacement market. The replacement market is expected to grow by 20% over the next 3-4 years.

Gaining exports

Cheaper production and improved quality of the Indian auto components have helped India become an outsourcing hub for auto components. NRB is increasingly focusing on exports markets. Over the last five years, NRBs exports have grown at a CAGR of 27%, accounting for 8% of the total sales of the company. The company is targeting an export growth of 35-40% over the next 3-4 years.

Concern

The Indian bearing industry is highly competitive and there could be further increase in competition with the entry of foreign brands in the domestic market. As the company is operating at higher margins, it would be able to remain competitive. The promoters are holding almost 80% of the equity of the company. There could be further dilution in the equity, though the step should result in increased public participation and increased liquidity in the stock.

Valuations

As the company happens to be the market leader and one of the lowest-cost producers of quality needle bearing worldwide, it will be a major beneficiary of the countrys growing auto demand. The undergoing capacity expansion and sustained inflow of orders from domestic and global OEM are expected to drive the growth. At Rs 555, the company is trading at a PE(x) of 16, based on the trailing four quarter EPS at Rs 34.69.

The author does not have any investments in the company