SKF vs FAG: Bearings biggies face off (Part III)

In the previous article, we discussed the topline trend of the two largest bearing manufacturers viz. SKF India and FAG Bearings. We will now focus on how their profitability has been over the past few years.

Let us consider operating performance first. As shown in the chart below, FAG's operating margins have remained consistently higher than that of SKF's over the past five years. Both the companies suffered a margin hit in 2009 but even then, FAG's margins came in higher than its counterpart. But the picture reverses if one considers the CAGR (compounded average annual growth rate) in operating profit. Between CY05 and CY10, SKF's operating profits have grown at a CAGR of 22%, slightly higher than FAG's 18%. This is because SKF has been able to keep its margins intact for both the years under consideration. FAG, on the other hand, has witnessed a slight contraction for the same time period.

Both the players are also different in the way the operating margins are composed. For SKF, margin of traded goods is on the higher side than that of bearings manufactured in house (margins of traded goods take into account only purchase and sale of traded goods). But in the case of FAG, margins for in house products have been higher for most of the years under consideration. This perhaps points towards the fact that while SKF imports most of the high value add products; FAG manufactures some of it in house.

Source: Equitymaster

Let us now move on to net profit margins. While FAG had an edge over SKF on the operating margin front, the differential narrows down a bit by the time the net profit figures are reached. This could be attributed to slightly lower depreciation charges of SKF and absence of any extraordinary losses. However, on account of better performance at the operating level, FAG still noses ahead of SKF with an average net profit margin of around 12% between CY06 and CY10. The same for SKF came in the region of 8%. CAGR wise, SKF's profit growth at 22% between CY05 and CY10 comes in slightly better than FAG's 20% during the same period.

To conclude, yet again, there was very little to choose between the two on the profitability parameters as only a few percentage points separated them.

It will be interesting to see what will be the result like when we compare the capital efficiency of SKF and FAG in our next article in the series.

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