Friday, April 20, 2012

>SKF INDIA: Developed the revolutionary “StopGo” bearing for the two-wheeler sector

SKF India has developed the revolutionary “StopGo” bearing for the two-wheeler sector on the lines of the “Start-Stop” technology, which shuts down the engine when a vehicle is not moving. The installation of this bearing in two-wheelers can increase fuel economy by 6-10%.

In Q1CY2012, the company’s other expenses/sales ratio was the lowest in three years for any quarter as there were no foreign exchange (forex) losses. In CY2011, the company had suffered a forex loss of Rs15.4 crore.

The company has planned capital expenditure (capex) of Rs100 crore for CY2012 which remains modest. It proposes to expand all three plants, ie the Bangalore, Pune and Haridwar plants.

The company passed an enabling resolution for Buyback of shares. This may act as a support for the stock. Promoters currently hold 53.5% stake in the company.

The company’s sales in Q1CY2012 were affected by a slowdown in the industrial bearing sector. Concerns specifically pertain to the wind power sector where the accelerated deprecation scheme ended on March 31, 2012. Some reports expect atleast a 15% decline in the demand for wind turbines if the accelerated depreciation scheme is not extended beyond March 31, 2012.

SKF India continues to support SKF Technologies (a company owned directly by SKF Sweden) and has increased the loan amount to the company from Rs162 crore in CY2010 to Rs209 crore in CY2011. The company received interest income on the same but it is difficult to ascertain the commercial and transfer pricing arrangement.

View: We see continued challenges in growing the sales in CY2012 as the overall industrial activity remains subdued. There is also an overhang of the wind power sector slowing down which will affect the industrial revenues of the company in the next few quarters.

The automotive business also faces a challenging growth environment in the second and third quarters of CY2012. We are lowering our revenue growth projection for CY2012 to flat revenue year on year (YoY). There is no change in the contribution margin. Unusually low other expenses/ sales ratio reported in Q1CY2012, would inch back to 14.5% as it contains write-back of Rs7.5 crore pertaining to extra provisioning done in employee expense during Q4CY2011.

Our earnings per share (EPS) growth projection for CY2012 stands at Rs43.3, indicating a growth of 9.5%. At Rs700 the stock trades at 16.2x CY2012 earnings and prices in the positives fully.

The stock’s valuation is towards the higher end but the revolutionary “StopGo” bearing product for two-wheelers seems to have a great application. While we do expect the two-wheeler industry to introduce products on the “StopGo”, the expensive valuation and muted growth leaves little room for any meaningful upside. However, we also take note of a strong possibility of buy-back of shares. This keep us neutral on the stock.