>SKF India Ltd. (LKP Shares)

INVESTMENT ARGUMENT

• SKF India is the 53.5% subsidiary of the Swedish bearing giant and is the largest bearing producer in India. It derives 90% of its revenues from bearings comprising of ball and hub bearings, deep groove ball bearings, cylindrical roller bearings and tapered roller bearings. The balance 10% of revenues comes from its four new technology platforms like seals, lubrication systems, mechatronics and services. The strategy has been to bundle all service platforms together so as to provide the customers an integrated solution, which can positively impact
their cost of operations.

• Domestic business accounts for 90% of its revenues and both the automotive and industrial segment have an equal share of this pie with most of the large players being customers of SKF India. SKF India being the industry leader controls a 30% share in the Rs50bn bearing market in India.

• SKF India with a capacity of producing 119m bearings at its facilities in Pune and Bangalore was prior to CY'06 following the indenting commission business model and shifted to the direct customer delivery model since then which enabled the company to account for revenues accrued from trading activities which was substantial at ~ 40%.

• The Rs16bn SKF India has been a victim of the slowdown in both the automotive and the industrial segment during Q4-CY'08 with net profit during Q4CY'08 dropping sharply to Rs163mn as automotive companies resorted to plant shutdown and lesser working days since November 2008 to reduce inventory piling and align their production with market demand which contracted due to reduction in freight availability on account of moderation in economic growth. The situation has not turned any better for the company even in Q1-CY'09 and we expect SKF India to face the pressure on the bottom line as net profit during the same period last year was Rs378mn on net revenues of Rs4bn.

• The automotive sector continues to be impacted by tight credit terms, high cost of finance, pricing pressures and weak consumer demand from fleet operators while the industrial segment is witnessing a slowdown across industries and CY'09 is expected to be a challenging year for SKF India even as softening input costs like steel would start benefiting the company from Q1-CY'09.

• SKF India is now going ahead with its new 48m ball bearing unit at Haridwar in Uttarkhand which would add close to 50% more capacity from CY'10 onwards at a cost of Rs1.5bn and would initially service the two-wheeler companies whose demand is expected to show a marginal rise on account of the incremental demand from the rural and semi-urban markets. The game plan for SKF India is in sync with that of its key customers like Hero Honda and its plans from its Haridwar unit.

• The investment phase for the company this fiscal along with the challenging environment is expected to put pressure on the ROI, as the benefits would start accruing only from next fiscal onwards. SKF India with a strong balance sheet trades at 7xCY'09E and 5.7xCY'10E and we believe that a 15% correction in the stock price from current levels would be a good opportunity for gaining an entry into the stock with an 18-month price target of Rs190. Over a longer time frame a revival in its key user industries could propel the stock to Rs240 over a two-year time frame.

To see full report: SKF INDIA