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India I Equities Company Update

Change in Estimates Target Reco 

30 July 2018

SKF India Rating: Hold

Target Price: `1,890
Automotive business growth to be the driver; maintaining a Hold Share Price: `1,665
Against the backdrop of strong automotive business growth, we expect Key data SKF IN / SKFB.BO
SKF India’s revenue to clock an11% CAGR over FY18-20.While the 52-week high / low `2,010 / 1,477
industrial business is expected to be flat in H1 FY19, it is expected to Sensex / Nifty 37494 / 11320
3-m average volume $0.4m
grow as recovery in wind energy is anticipated. We maintain our Hold
Market cap `86bn / $1251.3m
rating on the stock, with a TP of `1,890.
Shares outstanding 51m
Automotive business growth momentum to continue. SKF India’s
Q1FY19 automotive business grew 8% y/y, fuelled by 29% growth in Shareholding pattern(%) Jun'18 Mar'18 Dec'17
replacement and 1% y/y drop in OEM. In the following quarters, we expect Promoters 52.3 52.3 52.3
the company’s OEM sales to grow stronger. We expect the automotive - of which, Pledged 0.0 0.0 0.0
Free float 47.7 47.7 47.7
business to clock a 12% CAGR over FY18-20, driven by 14% growth in OEM
- Foreign institutions 9.4 9.6 10.9
and 10% growth in replacement.
- Domestic institutions 24.9 24.4 23.1
While its industrial business was flat, at 9% y/y, growth in replacement and - - Public 13.5 13.6 13.7
7% y/y growth in OEM, we expect its industrial business to record a
10%CAGR over FY18-20, driven by 10% growth in OEM because of the Estimates revision (%) FY19e FY20e
recovery in wind energy, and 11% growth in the replacement market. Sales 0.0 0.0
EBITDA 3.4 3.3
Profitability to be stable. While the lower-traded business and internal-cost EPS 3.9 3.7
measures may lead to higher margins, we expect them to be stable, given RM
cost pressures. Thus, we expect EBITDA margins to hold at around 16.6%.
Relative price performance
Q1 FY19 result highlights. 1) Hub-bearings orders for export likely to 2,000
commence from Oct’18,2) FY19 capex is `1,000m, similar for FY20.3) 1,900
SKF

Exports declined 30%y/y. 1,800

`
Valuation. With the gains from new Railways orders, and growth in
1,700
1,600
automotive and industrial demand, the company is poised for growth.
1,500 Sensex
Expecting earnings to clock a 15%CAGR over FY18-20,we maintain our Hold
1,400
rating, valuing the stock at 25x FY20 earnings, and arriving at a target of
Aug-17
Sep-17

Nov-17
Dec-17
Jul-17

Feb-18
Mar-18

Jul-18
Oct-17

Jan-18

Apr-18
May-18
Jun-18

`1,890. Risks: Slowdown in industrial activity and auto sales; commodity price
fluctuations. Source: Bloomberg

Key financials (YE Mar) FY16 FY17 FY18 FY19e FY20e

Sales (` m) 29,973 26,314 27,504 30,613 34,146
Net profit (` m) 2,559 2,439 2,959 3,461 3,881
EPS (`) 48.5 46.3 57.6 67.4 75.6
PE (x) 25.7 34.2 30.2 24.7 22.0
Vijay Sarthy TS
EV / EBITDA (x) 16.4 22.6 18.7 14.9 13.0
Research Analyst
PBV (x) 5.1 4.7 4.7 4.1 3.6 +9122 6626 6569
RoE (%) 15.4 14.0 16.2 17.6 17.3 vijaysarthy@rathi.com
RoCE (%) 14.9 13.7 16.0 17.2 17.0
Mayank Agarwal
Dividend yield (%) 0.9 0.6 0.9 1.0 1.1 Research Associate
Net debt / equity (x) -0.4 -0.3 -0.4 -0.3 -0.3 +9122 6626 6569
vijaysarthy@rathi.com
Source: Company, Anand Rathi Research

Anand Rathi Share and Stock Brokers Limited (hereinafter “ARSSBL”) is a full-service brokerage and equities-research firm and the views expressed therein are solely of
ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient. Disclosures and analyst
certifications are present in the Appendix.

AnandRathi Research India Equities

30 July 2018 SKF India – Automotive business growth to be the driver; maintaining a Hold

Quick Glance – Financials and Valuations

Fig 1 – Income statement (`m) Fig 2 – Balance sheet (` m)
Year-end: Mar FY16 FY17 FY18 FY19e FY20e Year-end: Mar FY16 FY17 FY18 FY19e FY20e
Net revenues 29,973 26,314 27,504 30,613 34,146 Share capital 527 527 513 513 513
Growth (%) 24.2 -12.2 4.5 11.3 11.5 Net worth 16,646 18,112 18,373 21,004 23,953
Direct costs 21,258 18,474 18,436 20,522 22,927 Total debt 650 340 850 850 850
SG&A 5,100 4,478 4,720 5,016 5,538 Minority interest
EBITDA 3,615 3,362 4,348 5,075 5,681 DTL/(asset) -86 -115 -175 -228 -288
EBITDA margins (%) 12.1 12.8 15.8 16.6 16.6 Capital employed 17,210 18,337 19,048 21,625 24,515
- Depreciation 684 479 457 534 582 Net tangible assets 2,979 2,806 2,753 3,589 4,008
Other income 1,014 873 714 838 932 Net intangible assets
Interest expenses - - 50 55 60 Goodwill
Extraordinary items - - - - - CWIP (tang.&intang.) 119 352 371 - -
PBT 3,945 3,756 4,555 5,325 5,971 Investments (strategic)
Effective tax rate (%) 35 35 35 35 35 Investments (financial) 189 1,671 1,712 2,712 4,212
+ Associates/(minorities) Current assets (ex cash) 11,139 12,181 12,001 13,358 14,900
Net income 2,559 2,439 2,959 3,461 3,881 Cash 6,973 5,915 7,426 7,844 8,025
Adjusted income 2,559 2,439 2,959 3,461 3,881 Current liabilities 4,190 4,588 5,215 5,878 6,629
WANS 53 53 51 51 51 Working capital 6,949 7,594 6,786 7,480 8,271
FDEPS (` / sh) 48.5 46.3 57.6 67.4 75.6 Capital deployed 17,210 18,337 19,048 21,625 24,515

Fig 3 – Cash-flow statement (`m) Fig 4 – Ratio analysis

Year-end: Mar FY16 FY17 FY18 FY19e FY20e Year-end: Mar FY16 FY17 FY18 FY19e FY20e
PBT 2,931 2,883 3,891 4,541 5,099 P/E (x) 25.7 34.2 30.2 24.7 22.0
+ Non-cash items 684 479 457 534 582 EV / EBITDA (x) 16.4 22.6 18.7 14.9 13.0
Oper.prof. before WC 3,615 3,362 4,348 5,075 5,681 EV / sales (x) 2.0 3.0 3.0 2.6 2.3
- Incr./(decr.) in WC -1,826 -644 807 -694 -791 P/B (x) 5.1 4.7 4.7 4.1 3.6
Others incl. taxes 1,472.70 1,346.30 1,655.90 1,916.91 2,149.58 RoE (%) 15.4 14.0 16.2 17.6 17.3
Operating cash-flow 317 1,371 3,500 2,465 2,740 RoCE (%) - after tax 14.9 13.7 16.0 17.2 17.0
- Capex (tang.+intang.) 129 539 423 1,000 1,000 RoIC (%) - after tax 20 18 24 28 28
Free cash-flow 188 832 3,077 1,465 1,740 DPS (` /sh) 15.5 10.3 14.4 16.2 18.1
Acquisitions Dividend yield (%) 0.9 0.6 0.9 1.0 1.1
- Div.(incl. taxes) 952 633 739 831 931 Dividend payout (%) - incl. DDT 37.2 25.9 25.0 24.0 24.0
+ Equity raised/buy-back - - -2,085 - - Net debt / equity (x) -0.4 -0.3 -0.4 -0.3 -0.3
+ Debt raised 650 -310 510 - - Receivables (days) 41 52 54 51 65.13
- Fin investments -7 1,482 40 1,000 1,500 Inventory (days) 65 94 92 91 91
- Misc. (CFI + CFF) -1,733 -533 -790 -784 -872 Payables (days) 57 68 89 88 88
Net cash-flow 1,626 -1,059 1,512 418 181 CFO:PAT % 12 56 118 71 71
Source: Company, AnandRathi Research Source: Company, AnandRathi Research

Fig 5 – Price movement Fig 6 – Revenue mix (Q1 FY19)

(`)
2,500 Export
7%
Replacement
2,000 Automotive OEM Automitive
SKF 14% 29%

1,500

1,000

500 Replacement
Industrial
25%
0
OEM Industrial
Jan-14

Jan-15

Jan-16

Jan-17

Jan-18
Apr-14

Apr-15

Apr-16

Apr-17

Apr-18
Jul-13
Oct-13

Jul-14
Oct-14

Jul-15
Oct-15

Jul-16
Oct-16

Jul-17
Oct-17

Jul-18

25%

Source: Bloomberg Source: Company

Anand Rathi Research 2

30 July 2018 SKF India – Automotive business growth to be the driver; maintaining a Hold

Quarterly financials
Fig 7–Quarterly performance
(`m) Q1 FY18 Q2 FY18 Q3 FY18 Q4 FY18 Q1 FY19
Sales 6,436 6,665 6,798 7,005 7,036
Y/Y (%) 6.4 2.3 2.7 5.4 7.6
Q/Q (%) 10.8 1.9 2.0 3.0 0.4
Raw material 4,109 3,958 4,058 4,015 4,038
% of sales 63.1 59.4 59.7 57.3 57.4
Y/Y (%) 4.8 (3.7) (1.4) (0.1) 0.7
Q/Q (%) 16 (1) 3 (1) 1
Gross margins (%) 36.9 40.6 40.3 42.7 42.6
Employee cost 548 581 588 604 596
% of sales 8.4 8.7 8.6 8.6 8.5
Y/Y (%) 4.4 6.1 7.1 5.1 8.0
Q/Q (%) 2.0 5.4 1.1 2.7 (1.3)
Other expenses 1,019 1,190 1,042 1,156 1,342
% of sales 15.6 17.9 15.3 16.5 19.1
Y/Y (%) 0.8 16.8 (6.8) (0.4) 13.7
Q/Q (%) 6.2 0.8 (12.4) 10.9 16.1
Expenses 5,676 5,729 5,687 5,775 5,975
EBITDA 837 936 1,111 1,230 1,061
EBITDA margins (%) 12.8 14.0 16.3 17.6 15.1
Y/Y (%) 26.46 11.9 32.2 38.1 33.5
Q/Q (%) (0) 18 19 11 (14)
Other income 218 171 165 200 188
Interest - 17 16 17
Depreciation 123 115 114 113 115
PBT 932 992 1,145 1,302 1,117
Tax 328 349 405 440 402
Tax rate (%) 35.2 35.2 35.4 33.8 35.9
Net profit (adjusted) 604 643 740 862 716
Y/Y (%) 29.75 6.41 22.73 31.85 23.59
Q/Q (%) 17 11 15 16 (17)
EPS (`) 11.5 12.5 14.4 16.8 13.9
Source: Company

AnandRathi Research 3
30 July 2018 SKF India – Automotive business growth to be the driver; maintaining a Hold

Valuation
Valuation. With the benefits from the new Railways orders, and growth in
automotive and industrial demand, the company is poised for good growth.
We expect earnings to record a 15% CAGR over FY18-20, and thus
maintain our Hold rating, while valuing the stock at 25x FY20 earnings, and
arriving at a target of `1,890.

Fig 8 –Change in estimates

Old estimates Revised Estimates Change (%)
(` m) FY19 FY20 FY19 FY20 FY19 FY20
Revenue 30,613 34,146 30,613 34,146 0.0 0.0
EBITDA 4,909 5,502 5,075 5,681 3.4 3.3
Adj. PAT 3,332 3,743 3,461 3,881 3.9 3.7
EPS (`) 65 73 67 76 3.9 3.7
Source: Anand Rathi Research

Fig 9 – PE band
2,000

28x

1,600
24x

20x
1,200

16x

800

400
Feb-13
Jul-13
Nov-13
Mar-14
Aug-14
Dec-14
Apr-15
Aug-15
Jan-16
May-16
Sep-16
Feb-17
Jun-17
Oct-17
Mar-18
Jul-18
Source: Bloomberg

Risks
 Slowdown in industrial activity and auto sales.
 Commodity price fluctuations.

AnandRathi Research 4
Appendix
Analyst Certification
The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the
compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research
analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange
Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have
no bearing whatsoever on any recommendation that they have given in the Research Report.

Important Disclosures on subject companies

Rating and Target Price History (as of 30 July 2018)
TP Share
2,500
SKF Date Rating (`) Price (`)
1 24-Sep-12 Hold 730 635
2,000 16 2 25-Oct-12 Hold 724 667
15 3 26-Nov-12 Buy 724 600
14 4 04-Mar-13 Buy 622 510
1,500 5 25-Oct-13 Buy 641 580
12 6 09-Jan-14 Hold 641 660
11 13
10 7 05-Mar-14 Hold 761 740
1,000 8 9 8 07-Apr-14 Hold 812 816
2 6 7 9 14-Jul-14 Hold 1,015 1,069
1
10 28-Oct-14 Buy 1,324 1,109
500
3 5 11 24-Jul-15 Hold 1,404 1,374
4
12 03-Nov-15 Hold 1,388 1,282
0 13 29-Oct-16 Hold 1,597 1,420
14 17-Feb-17 Hold 1,518 1,432
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Jul-15
Oct-15
Jan-16
Apr-16
Jul-16
Oct-16
Jan-17
Apr-17
Jul-17
Oct-17
Jan-18
Apr-18
Jul-18
15 02-Aug-17 Hold 1,652 1,589
16 10-May-18 Hold 1,823 1,795

Anand Rathi Ratings Definitions

Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described
in the Ratings Table below:
Ratings Guide (12 months)
Buy Hold Sell
Large Caps (>US$1bn) >15% 5-15% <5%
Mid/Small Caps (<US$1bn) >25% 5-25% <5%

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