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SKF India: A slow start to 2015 - Views on News from Equitymaster
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SKF India: A slow start to 2015
May 4, 2015

SKF India announced its results for the quarter ended March 2015. The company reported a 1% YoY rise in revenues, while profits rose by 4% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Net sales are up by 1% on a YoY basis during the quarter.
  • Operating profits down by 14% YoY on account of higher excise duty, reclassification of other operating income and change in product mix.
  • Net profits up by 4% YoY due to higher other income.
Financial snapshot
(Rs m) 1QCY14 1QCY15 Change
Revenues 5,795 5,856 1.1%
Expenditure 5,096 5,256 3.1%
Operating profit (EBDITA) 698 601 -14.0%
Operating profit margin (%) 12.1% 10.3%  
Other income 184 335 81.9%
Depreciation 132 157 18.4%
Exceptional items - -  
Profit before tax 750 779 3.8%
Tax 259 267 2.8%
Profit after tax/(loss) 491 512 4.4%
Net profit margin (%) 8.5% 8.7%  
No. of shares (m) 52.7 52.7  
Basic earnings per share (Rs)   38.9  
P/E ratio (x) *   34.8  
* trailing 12 months earnings

What has driven performance in 1QCY15?
  • SKF India's revenues were marginally higher during the quarter ended March 2015. The company's reported operating profits were lower by 14% YoY. However, it should be pointed out here that the new reporting standard requires companies to show their forex gains or losses (arising out of operations too) in other income. If the forex gains from operations were to be included here, then the operating profits would have been higher by about Rs 125 m for the quarter. Further, the company's management did also mention that the excise duty component was higher by about Rs 80 m during the quarter on account of change in opening and closing stock.

    (Rs m) 1QCY14 1QCY15 Change
    RM costs 3,594 3,671 2%
    % of sales 62.0% 62.7%  
    Employee benefit expenses 514 510 -1%
    % of sales 8.9% 8.7%  
    Other expenses 989 1,075 9%
    % of sales 17.1% 18.3%  
    Total expenses 5,096 5,256 3%
    Data Source: Company

  • Net profits came in higher by about 4% YoY on account of higher other income.
What to expect?
At the current price of Rs 1,354, the stock of SKF India is trading at a multiple of about 35 times its trailing twelve month earnings.

As per the company's management, certain sectors from the industrial segment such as renewable energy, material handling, off highway tyres spaces are doing well. However, same cannot be said for the tractors and 2-wheelers segment. To sum it up broadly, the company is seeing activity in the infrastructure space, while the sectors dependent on rural economy are doing poor. When it came to the segment wise date, not much has changed with industrial-auto-export spaces contributing to about 49%, 43% and 8% of revenues respectively.

Going forward, the company intends to do capex of about Rs 400 to Rs 500 m in the current year, largely towards catering to the auto sector. However, current utilisation levels are still far from reaching maximum capacity with the plants still having capacity to scale up by about 15% to 20%.

Over the medium term, railways is expected to be a big opportunity with the company now entering the freight car segment which forms about 60% of the overall market. This is expected to throw up big opportunities in the future for SKF.

As for our view on the stock of SKF India, we believe it has run up substantially in the short run and thus maintain our 'buy at lower price view' for now. We however, will take a relook at our estimates and come out with an update if required.

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