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4QCY2011 Result Update | Auto Ancillary

February 10, 2012

FAG Bearings
Performance Highlights
Y/E Dec. (` cr) Net sales EBITDA EBITDA margin (%) Reported PAT
Source: Company, Angel Research

ACCUMULATE
CMP Target Price
4QCY10 266 52 19.6 34 % chg (yoy) 31.4 21.3 (150)bp 27.3 Angel est. 310 58 18.8 39 % diff. 12.7 8.3 (73)bp 11.5

`1,323 `1,457
12 Months

4QCY11 350 63 18.1 43

Investment Period

Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Auto Ancillary 2,199 0.4 1,435/752 3,424 10 17,749 5,382 FAGB.BO FAG@IN

FAG Bearings (FAG) reported a strong set of results for 4QCY2011, despite a marginal slowdown in the automotive and industrial sectors, the companys main growth drivers. Results were ahead of our estimates mainly due to strong top-line growth; the companys operating margin was, however, negatively impacted due to higher proportion of traded goods. We rollover to CY2013E and recommend Accumulate on the stock. Margin pressures restrict profitability: FAG posted strong 31.4% yoy (4.8% qoq) growth in its top line to `350cr, despite sluggish automotive demand and slowdown in industrial activity. EBITDA margin declined by 150bp yoy (170bp qoq) to 18.1% due to the surge in raw-material cost, primarily on the trading part of the business. In our view, this could be because of INR depreciation against EUR, which resulted in a 480bp yoy increase in traded goods as a percentage of sales. However, the 380bp yoy decline in other expenditure as a percentage of sales prevented the margin from declining further. Nonetheless, led by robust top-line growth, net profit grew strongly by 27.3% yoy to `43cr. However, sequentially, it declined by 5.4% mainly due to EBITDA margin contraction. Outlook and valuation: We maintain our positive stance on FAG, considering its strong parentage, debt-free status and cash balance worth `140/share on books. At `1,323, the stock is trading at 10x CY2013E earnings. We rollover to CY2013E and recommend Accumulate on the stock with a target price of `1,457, valuing the stock at 11x CY2013E earnings.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 51.3 23.3 13.9 11.5

Abs. (%) Sensex FAG Bearings

3m 2.2 2.0

1yr 1.6

3yr 84.0

73.8 463.6

Key financials
Y/E Dec. (` cr) Net sales % chg Adj. net profit % chg EBITDA margin (%) Adj. EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

CY2010 1,047 27.7 123 68.4 17.8 73.1 18.1 3.8 23.5 31.8 1.7 10.3

CY2011E 1,312 25.3 176 43.0 19.6 105.9 12.5 3.0 27.0 35.9 1.4 7.6

CY2012E 1,526 16.3 197 11.8 18.9 118.4 11.2 2.4 23.9 31.8 1.1 6.3

CY2013E 1,726 13.1 220 11.9 18.6 132.5 10.0 2.0 21.6 28.7 0.9 5.2
24040 3800 Ext: 344

Yaresh Kothari
022-3935 7800 Ext: 6844 yareshb.kothari@angelbroking.com

Please refer to important disclosures at the end of this report

FAG Bearings | 4QCY2011 Result Update

Exhibit 1: Quarterly performance


Y/E Dec. (` cr) Net sales Consumption of RM (% of sales) Staff costs (% of sales) Purchases of goods (% of sales) Other expenses (% of sales) Total expenditure Operating profit OPM (%) Interest Depreciation Other income PBT (excl. extr. items) Extr. income/(expense) PBT (incl. extr. items) (% of sales) Provision for taxation (% of PBT) Reported PAT PATM (%) Equity capital (cr) EPS (`)
Source: Company, Angel Research

4QCY11 350 114 32.7 27 7.8 100 28.5 45 13.0 286 63 18.1 0 6 7 63 63 18.1 20 32.2 43 12.3 16.6 25.8

4QCY10 266 84 31.6 22 8.3 63 23.7 45 16.8 214 52 19.6 0 5 6 53 3 50 18.8 16 32.5 34 12.7 16.6 20.3

% chg 31.4 35.9 23.3 58.0 1.1 33.8 21.3 33.3 24.7 17.5 20.5 26.7 27.3 27.3

CY2011 1,312 414 31.5 101 7.7 343 26.2 196 14.9 1,055 258 19.6 1 23 27 261 261 19.9 85 32.6 176 13.4 16.6 105.9

CY2010 1,049 320 30.6 80 7.6 292 27.9 167 16.0 860 189 18.0 1 20 17 184 3 182 17.3 60 33.2 122 11.6 16.6 73.1

% chg 25.2 29.2 26.6 17.6 17.1 22.6 36.6 41.6 12.3 61.5 41.5 43.5

44.8

44.8

Better-than-expected top-line growth of 31.4% yoy: FAG reported a strong 31.4% yoy (4.8% qoq) increase in its top line to `350cr, above our expectation of `310cr. Revenue performance exceeded estimates despite sluggish demand in the automotive market and slowdown in industrial activity.

February 10, 2012

FAG Bearings | 4QCY2011 Result Update

Exhibit 2: Better-than-expected net sales growth of 31.4% yoy


(`cr) 400 350 300 250 200 150 100 50 0 21.0 25.2 21.4 17.1
Net sales (LHS) Net sales growth (RHS)

34.7

31.5

31.4 30.5 22.5

(%) 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0

4QCY09

1QCY10

2QCY10

3QCY10

4QCY10

1QCY11

2QCY11

3QCY11

Source: Company, Angel Research

EBITDA margin contracts to 18.1%: For 4QCY2011, FAGs EBITDA margin contracted by 150bp yoy (170bp qoq) to 18.1% on account of surge in raw-material expenses, primarily on the trading part of the business. In our view, this could be because of INR depreciation against EUR, which resulted in a 480bp yoy increase in traded goods as a percentage of sales. However, the 380bp yoy decline in other expenditure as a percentage prevented the margin from declining further. As a result, operating profit grew by 21.3% yoy (down 4.2% qoq) to `63cr.

Exhibit 3: EBITDA margin trend


(%) 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 12.6 15.3 19.1 17.7 19.9 20.5 20.3 19.8 18.1 64.1 EBITDA margin Raw material cost/sales

Exhibit 4: Net profit growth remains strong


(` cr) 50 45 40 35 30 25 20 15 10 5 0 Net profit (LHS) 12.4 9.5 7.5 12.7 Net profit margin (RHS) 13.8 14.0 13.6 12.3 (%) 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0

62.0

59.9

58.0

56.0

56.5

56.3

58.2

61.8

11.5

4QCY09

1QCY10

2QCY10

3QCY10

4QCY10

1QCY11

2QCY11

3QCY11

4QCY11

4QCY09

1QCY10

2QCY10

3QCY10

4QCY10

1QCY11

2QCY11

3QCY11

Source: Company, Angel research

Source: Company, Angel research

Net profit up 27.3% yoy: Led by robust top-line growth, net profit grew strongly by 27.3% yoy to `43cr. However, on a sequential basis, it declined by 5.4% mainly due to operating margin contraction.

February 10, 2012

4QCY11

4QCY11

FAG Bearings | 4QCY2011 Result Update

Investment arguments
Second-largest player with a ~15% market share: FAG is the second-largest player in the Indian bearing industry, with a total market share of ~15%. The company is also a market leader in the spherical roller bearing segment, with a market share of ~55%. FAG is a member of the Schaeffler Group, Germany, a global leader in the rolling element bearing segment and one of the most prominent industry players. We believe healthy demand in the auto and industrial segments will aid FAG in registering a CAGR of ~15% in net sales over CY2011-13E. Industry outlook likely to improve on interest rate easing: We believe there is likely to be an uptick in the industrial segment in the next three-four quarters, driven by increased demand from capital goods companies. Also, the auto segment is likely to grow, driven by an 11-12% CAGR in the auto sectors volumes over FY2011-13E. The company has a strong customer base (such as Maruti, M&M, Tata Motors, GM, Ford and Daimler Chrysler) in this segment. Strong fundamentals: FAGs net asset turnover remains high (~7x in CY2010) due to largely depreciated assets. The companys strong business model enables it to record robust and consistent RoCE of ~30%. Cash flow generation is also expected to remain healthy going forward.

Outlook and valuation


We maintain our positive stance on FAG, considering its strong parentage, debt-free status and cash balance worth `140/share on books. We expect FAG to register a healthy CAGR of ~15% in net sales and ~12% in net profit over CY2011-13E. At `1,323, the stock is trading at 10x CY2013E earnings. We rollover to CY2013E and recommend Accumulate on the stock with a target price of `1,457, valuing the stock at 11x CY2013E earnings.

Key risks
1) Revival in demand in the automotive and industrial segments post easing of interest rates from CY2012 poses an upside risk to our earnings estimates and, therefore, the target price. 2) Adverse currency movement can negatively affect FAGs trading business. 3) Cheap imports from China could affect business of bearing players like FAG.

Exhibit 5: Key assumptions


Y/E Dec. Ball and roller bearings (mn units) yoy chg (%) Utilisation (%)
Source: Company, Angel Research

CY08 46.0 1.5 93

CY09 50.2 9.1 95

CY10 67.2 33.8 135

CY11E 83.8 24.7 139

CY12E CY13E 95.4 13.8 142 106.7 11.9 159

February 10, 2012

FAG Bearings | 4QCY2011 Result Update

Exhibit 6 : One-year forward P/E band


(`) 2,500 2,000 1,500 1,000 500 0 Share Price (`) 4x 8x 12x 16x

Dec-09

Mar-07

Nov-07

Aug-10

Oct-03

Feb-05

Oct-05

May-11

Jun-04

Source: Company, Bloomberg, Angel research

Exhibit 7: Auto Ancillary Recommendation summary


Company
Amara Raja Automotive Axle Bharat Forge* Bosch India# Exide Industries FAG Bearings Subros
# ^

Reco.
Neutral Neutral Accumulate Neutral Neutral Accumulate Neutral Accumulate

CMP (`)
255 487 305 7,425 135 1,323 178 26

Tgt. price (`)


332 1,457 28

Upside (%)
9.0 10.1 8.3
#

P/E (x) FY12E


12.2 10.0 17.0 21.8 25.4 11.2 19.6 9.0

EV/EBITDA (x) FY12E


7.0 5.5 7.9 13.4 14.6 6.3 9.4 4.7

Apr-09

RoE (%) FY12E


24.7 27.6 19.7 21.3 15.6 23.9 20.2 7.4

FY11-13E EPS CAGR (%)


17.3 20.7 33.3 17.2 2.4 11.9 10.0 (0.9)

FY13E
10.7 8.8 13.8 19.8 17.2 10.0 14.8 5.5
^

FY13E
6.0 4.5 6.5 11.7 10.1 5.2 7.8 3.7

FY13E
22.9 26.2 20.6 19.5 20.3 21.6 22.7 11.5

Motherson Sumi*

Source: Company, Angel Research; Note: * Consolidated Results;

December year end;

September year end

February 10, 2012

Jan-12

Jul-06

Jul-08

FAG Bearings | 4QCY2011 Result Update

Profit & loss statement


Y/E Dec. (` cr) Gross sales Less: Excise duty Net Sales Total operating income % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation & Amortisation EBIT % chg (% of Net sales) Interest & other Charges Other Income (% of PBT) Extraordinary (Expense)/Inc. PBT Tax (% of PBT) PAT (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg CY08 816 69 762 762 17.0 600 407 59 66 67 162 14.9 21.3 21 142 16.3 18.6 0 6 4.0 (3) 150 52 34.4 99 96 20.4 12.6 57.6 57.6 20.4 CY09 845 46 820 820 7.6 709 506 63 63 77 111 (31.4) 13.6 20 91 (35.6) 11.1 1 9 8.3 (8) 107 34 31.8 73 66 (31.6) 8.0 39.4 39.4 (31.6) CY10 1,113 74 1,047 1,047 27.7 861 613 73 79 97 186 67.0 17.8 20 166 81.7 15.9 1 17 9.1 (2) 183 60 32.9 123 122 85.5 11.6 73.1 73.1 85.5 CY11E 1,406 93 1,312 1,312 25.3 1,055 757 84 101 112 258 38.5 19.6 23 235 41.7 17.9 1 27 10.4 261 85 32.6 176 176 44.8 13.4 105.9 105.9 44.8 CY12E 1,619 107 1,526 1,526 16.3 1,238 885 101 119 133 288 11.9 18.9 26 263 11.8 17.2 2 33 11.2 294 97 33.0 197 197 11.8 12.9 118.4 118.4 11.8 CY13E 1,829 121 1,726 1,726 13.1 1,405 1,001 117 135 152 321 11.3 18.6 28 293 11.5 17.0 2 38 11.6 329 108 33.0 220 220 11.9 12.8 132.5 132.5 11.9

February 10, 2012

FAG Bearings | 4QCY2011 Result Update

Balance sheet
Y/E Dec. (` cr) SOURCES OF FUNDS Equity Share Capital Reserves & Surplus Shareholders Funds Total Loans Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 400 252 148 15 0.3 385 64 48 274 138 247 411 413 272 142 7 0.3 461 173 78 210 143 317 466 419 278 141 9 0.3 628 288 81 258 201 426 576 574 301 274 11 0.0 682 233 92 357 235 448 733 611 326 284 12 0.6 879 385 99 395 258 621 918 651 354 297 13 0.8 1,104 534 112 458 291 814 1,125 17 388 405 6 411 17 445 462 5 466 17 557 573 3 576 17 713 730 3 733 17 898 915 3 918 17 1,105 1,122 3 1,125 CY08 CY09 CY10 CY11E CY12E CY13E

February 10, 2012

FAG Bearings | 4QCY2011 Result Update

Cash flow statement


Y/E Dec. (` cr) Profit before tax Depreciation Change in Working Capital Less: Others Other income Direct taxes paid Cash Flow from Operations (Inc.)/Dec. in Fixed Assets (Inc.)/Dec. in Investments Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balance Closing Cash balance CY08 CY09 150 21 (71) (6) (52) 43 (41) 1 6 (34) 8 (17) (9) (0) 64 64 107 20 40 39 (9) (34) 163 (5) 0 9 4 9 (67) (58) 109 64 173 CY10 CY11E CY12E CY13E 183 20 4 2 (17) (60) 132 (8) 0 17 9 10 (36) (26) 115 173 288 261 23 (76) (27) (85) 96 (158) 0 27 (131) 19 (19) (55) 288 233 294 26 (22) (33) (97) 168 (37) (1) 33 (4) 12 (12) 152 233 385 329 28 (44) (38) (108) 166 (42) (0) 38 (4) 14 (14) 149 385 534

February 10, 2012

FAG Bearings | 4QCY2011 Result Update

Key ratios
Y/E Dec. Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value DuPont Analysis EBIT margin (%) Tax retention ratio (x) Asset turnover (x) RoIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating RoE (%) Returns (%) RoCE (Pre-tax) Angel RoIC (Pre-tax) RoE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT/Interest) (0.2) (0.4) 295.5 (0.4) (1.6) 130.6 (0.5) (1.5) 186.5 (0.3) (0.9) 186.6 (0.4) (1.3) 123.0 (0.5) (1.7) 121.3 2.0 62 52 52 72 2.0 58 50 53 73 2.5 40 42 53 49 2.6 40 52 53 49 2.6 41 52 53 54 2.7 41 52 53 55 38.6 41.1 26.5 20.8 31.4 15.1 31.8 58.0 23.5 35.9 47.3 27.0 31.8 49.5 23.9 28.7 49.8 21.6 18.6 0.7 2.5 30.9 30.9 11.1 0.7 2.6 19.6 19.6 15.9 0.7 3.6 38.6 38.6 17.9 0.7 3.4 40.5 40.5 17.2 0.7 3.0 34.3 34.3 17.0 0.7 3.1 35.1 35.1 57.6 57.6 70.0 4.5 242.3 39.4 39.4 56.0 4.5 276.4 73.1 73.1 86.1 5.0 343.7 105.9 105.9 119.5 10.0 437.9 118.4 118.4 133.8 6.0 549.2 132.5 132.5 149.3 7.0 673.5 23.0 18.9 5.5 0.3 2.6 13.1 5.2 33.6 23.6 4.8 0.3 2.4 18.2 4.3 18.1 15.4 3.8 0.4 1.7 10.3 3.3 12.5 11.1 3.0 0.8 1.4 7.6 2.7 11.2 9.9 2.4 0.5 1.1 6.3 2.0 10.0 8.9 2.0 0.5 0.9 5.2 1.5 CY08 CY09 CY10 CY11E CY12E CY13E

February 10, 2012

FAG Bearings | 4QCY2011 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

FAG Bearing No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

February 10, 2012

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