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SKF: A dull finish to an average year
Mar 3, 2015

SKF India announced its results for the quarter and full year period ended December 2014. During the quarter, the company reported a 3% YoY growth in revenues, but a 16% YoY decline in profits. Here is our analysis of the results.

Performance summary
  • Revenues rise by 3% YoY during the quarter.
  • Operating profits however fall by a fourth as margins contract to 8.5% from 11.7% in same quarter last year.
  • Net profits decline by 16% YoY led by a poor operating performance.
  • For full year CY14, revenues and profits rise by 6% YoY and 22% respectively.
  • Board recommends dividend of Rs 2.5 per share for the quarter. Total dividend in the year is Rs 10 (dividend yield of 0.68%).

Financial snapshot
(Rs m) 4QCY13 4QCY14 Change CY13 CY14 Change
Revenues 5,996 6,154 2.6% 22,750 24,156 6.2%
Expenditure 5,296 5,628 6.3% 20,138 21,324 5.9%
Operating profit (EBDITA) 700 526 -24.9% 2,612 2,832 8.4%
Operating profit margin (%) 11.7% 8.5%   11.5% 11.7%  
Other income 167 216 29.5% 634 769 21.4%
Depreciation 131 137 4.5% 494 540 9.1%
Exceptional items - -   (221) -  
Profit before tax 736 605 -17.8% 2,530 3,062 21.0%
Tax 252 196 -22.1% 863 1,034 19.8%
Profit after tax/(loss) 484 409 -15.6% 1,667 2,028 21.6%
Net profit margin (%) 8.1% 6.6%   7.3% 8.4%  
No. of shares (m)        52.7  52.7  
Basic earnings per share (Rs)          38.5  
P/E ratio (x) *          37.7  
* trailing 12 months earnings

What has driven performance in 4QCY14?
  • SKF reported a revenue growth of 3% YoY during the quarter. In the previous quarter, the company's management had indicated of things improving going forward; however, as it turned out, the same was not the case. Slower than expected two wheeler sales growth was one of the key issues which led the company to cut production by about 7%to 8% during the quarter as a measure to control inventory. Other sectors that were subdued included off highway vehicles, railways, gear boxes and machine tools where recovery was not as good as expected. As per the company's management, sectors such as wind energy and medium & heavy commercial vehicles segments did well.

    (Rs m) 4QCY13 4QCY14 Change CY13 CY14 Change
    RM costs 3,881 3,926 1% 14,397 15,000 4%
    % of sales 64.7% 63.8%   63.3% 62.1%  
    Employee benefit expenses 415 629 52% 1,853 2,155 16%
    % of sales 6.9% 10.2%   8.1% 8.9%  
    Other expenses 1,000 1,073 7% 3,888 4,169 7%
    % of sales 16.7% 17.4%   17.1% 17.3%  
    Total expenses 5,296 5,628 6% 20,138 21,324 6%
    Data Source: Company

  • Operating margins declined to 8.5% during the quarter, which is quite dull as it is the lowest quarterly margins clocked by the company in about six years. As per the management, the key factors behind the same were a higher proportion of industrial product sales (relatively lower margin business), a cut back in production (thereby impacting volumes) and a onetime hit of Rs 120 m on revaluation of gratuity funds (an annual activity). Adjusting for the latter, margins would have been at levels of about 10.5%. Higher other income and a lower tax outgo led to a relatively lesser fall in profits during the quarter.

  • As for the full year CY14 performance, SKF clocked a 6% YoY rise (led by an equal share of price and volume growth) in revenues and a 22% YoY rise in profits (adjusting for extraordinary expenses in CY13, profits before tax are higher by about 11% YoY). At the operating level, the company did relatively better as margins expanded by 0.2% YoY to 11.7%.
What to expect?

At the current price of Rs 1,450, the stock of SKF India is trading at a multiple of about 37.7 times its trailing twelve month earnings and at about 28 times our CY16 estimates.

As stated in the previous quarter, the company is not looking at major capex in 2015 given that it is still not working at full capacity. As per the company, capex will be at levels of Rs 600 m for the full year, which is lower than the average of Rs 750 m in the past three years. This would however not include any capex towards new product lines - a decision that the company would take as and when it makes sense to do so. As per the company's management, it is currently mulling over setting up new capacity for products in the auto space - catering to the four wheeler and CV space mainly.

What was interesting this quarter was the fact that company forayed into the freight segment of the railway sector - a segment it was not catering to before. This opens up opportunities worth Rs 6 bn for the company. Further, the company is working towards increasing localization of the industrial bearings, which it largely sources from its parent company and SKF Technologies, which is the other Indian subsidiary of the parent company. This would allow SKF to increase market share given the costs would be lower (which can be passed on) as well as it would reduce the lead time for customers. In fact, as per the management, the strategy over the next few years is more with improving relations with customers as opposed to being largely focused on technology. Given that the industrial segment forms about half of the company's revenues, this would be an important factor going forward we believe.

We believe that a strong bearings player such as SKF India (who is also the largest player in the industry, one with a strong track record and a clean balance sheet) deserves higher valuations, however, we continue to believe that the upside is quite factored in at current levels and thus we maintain our view of waiting for a good correction before buying into the stock.

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