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SKF India: Exceptional charges take toll - Views on News from Equitymaster
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SKF India: Exceptional charges take toll
Jul 20, 2009

Performance summary
  • The topline of the company declines by 12.3% YoY presumably on account of lower demand from the industrial sector during the quarter.
  • Operating profits declines by 15.9% YoY, higher than the topline, thus causing EBITDA margins to decline by 0.6% to 12.6% during the quarter.
  • Bottomline declines by 51.8% YoY mainly on account of one time exceptional charges booked for VRS compensation during the quarter.
  • For the first half of CY09, net profits decline by 56.7% YoY on the back of 15.7% YoY fall in the topline.


(Rs m) 2QCY08 2QCY09 Change 1HCY08 1HCY09 Change
Net sales 4,312 3,781 -12.3% 8,233 6,939 -15.7%
Expenditure 3,745 3,304 -11.8% 7,075 6,225 -12.0%
Operating profit (EBDITA) 567 477 -15.9% 1,158 715 -38.3%
EBDITA margin (%) 13.2% 12.6%   14.1% 10.3%  
Other income 27 18 -33.7% 48 35 -27.9%
Interest (net) (39) (19)   (82) (64)  
Depreciation 71 75 5.3% 148 148 0.1%
Profit before tax 562 439 -21.9% 1,141 666 -41.7%
Exceptional Items   (168)   - (168)  
Tax 196 95 -51.5% 397.30 176 -55.6%
Profit after tax/(loss) 367 177 -51.8% 744 322 -56.7%
Net profit margin (%) 8.5% 4.7%   9.0% 4.6%  
No. of shares (m) 52.7 52.7   52.7 52.7  
Diluted earnings per share (Rs)*         16.2  
Price to earnings ratio (x)**         15.4  
(* annualised, ** on trailing twelve months earnings)

What has driven performance in 2QCY09?
  • The topline of the company declined by 12.3% YoY during the quarter, presumably on account of lower demand from the industrial sector. It may be noted that around 90% of sales of company are contributed by bearings, which primarily cater to automotive and industrial sectors. With demand from both these sectors remaining rather subdued, it has affected the growth of companies like SKF India that depend on them.

  • On the operating front, lower than proportionate decline in operating expenses as compared to topline led to fall in the operating profits by 15.9% YoY during the quarter. This was mainly on account of increase in the raw material and staff costs (as % sales). However, decline in purchase of traded goods and other expenditure (as % sales) have limited the decline in the operating profits. As a result, operating margins declined by mere 0.6% to 12.6% in 2QCY09.

    Cost break up
    (Rs m) 2QCY08 2QCY09 Change 1HCY08 1HCY09 Change
    Raw material 995 1,009 1.4% 1,927 1,971 2.3%
    % sales 23.1% 26.7%   23.4% 28.4%  
    Purchase of tarded goods 1,752 1,424 -18.7% 3,211 2,582 -19.6%
    % sales 40.6% 37.7%   39.0% 37.2%  
    Employee cost 295 337 14.3% 598 643 7.5%
    % sales 6.8% 8.9%   7.3% 9.3%  
    Other Expenditure 703 534   1,339 1,029  
    % sales 16.3% 14.1% -13% 16.3% 14.8% -9%

  • The decline in bottomline at 51.8% YoY has come in higher than operating profits mainly on account of one time exceptional charges booked for VRS compensation during the quarter. Excluding the exceptional charges, the decline in bottomline stands at 6.1% YoY. This was despite the fall in other income and higher depreciation charges during the quarter.

What to expect?
At current price of Rs 248, the stock is trading at a multiple of 8x its estimated CY11 earnings per share. While we have estimated no growth in the topline and a 16% decline in net profits for CY09, the company reported a greater decline on both the fronts during the first half. However, we believe that the company should be able to make up for the decline in the forthcoming quarters on account of a revival in the economy. We remain positive on the stock from a medium term perspective.

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