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SKF: Hopeful of better times ahead - Views on News from Equitymaster
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SKF: Hopeful of better times ahead
Nov 10, 2014

SKF India announced its results for the quarter and nine month period ended September 2014. During the quarter, the company reported a 7% YoY and 26% YoY growth in revenues and profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues rise by 7% YoY during the quarter.
  • Operating margins expand by 1.6% YoY to 13.4% led by lower input costs (as a percentage of sales).
  • Net profits rise by 26% YoY led by a strong operating performance coupled with higher other income and a benign rise in depreciation costs.
  • Revenues and profits during the 9-month period ended September 2014 rise by 7% YoY and 37% YoY.


Financial snapshot
(Rs m) 3QCY13 3QCY14 Change 9mCY13 9mCY14 Change
Revenues 5,726 6,128 7.0% 16,754 17,936 7.1%
Expenditure 5,052 5,305 5.0% 14,836 15,626 5.3%
Operating profit (EBDITA) 674 823 22.1% 1,917 2,311 20.5%
Operating profit margin (%) 11.8% 13.4%   11.4% 12.9%  
Other income 160 200 25.2% 462 549 18.9%
Depreciation 128 135 5.9% 363 403 10.8%
Exceptional items - -   (221) -  
Profit before tax 706 888 25.8% 1,795 2,457 36.9%
Tax 240 301 25.5% 611 838 37.1%
Profit after tax/(loss) 466 587 25.9% 1,183 1,619 36.8%
Net profit margin (%) 8.1% 9.6%   7.1% 9.0%  
No. of shares (m)       52.7 52.7  
Basic earnings per share (Rs)         39.9  
P/E ratio (x) *         32.1  
* trailing 12 months earnings

What has driven performance in 3QCY14?
  • SKF India reported a revenue growth of 7% YoY during the quarter ended September 2014. While the broader mix remains pretty much the same in terms of break up between industrial and auto business (including exports), the management did indicate that it is seeing traction in certain industries such as machine tools, renewable energy, railways as well as two-wheelers.

    (Rs m) 3QCY13 3QCY14 Change 9mCY13 9mCY14 Change
    RM costs 3,583 3,729 4% 10,476 11,026 5%
    % of sales 62.6% 60.9%   62.5% 61.5%  
    Employee benefit expenses 440 517 17% 1,438 1,526 6%
    % of sales 7.7% 8.4%   8.6% 8.5%  
    Other expenses 1,029 1,059 3% 2,922 3,073 5%
    % of sales 18.0% 17.3%   17.4% 17.1%  
    Total expenses 5,052 5,305 5% 14,836 15,626 5%
    Data Source: Company

  • The company's margins expanded to 13.4% - the highest margins clocked in the past ten quarters mainly due to lower input costs. This coupled with higher other income - largely interest income - led to a profit growth of 26% YoY.

  • As for the 9mCY14 performance, SKF's performance remained similar in terms of revenue growth with the same being higher by 7% YoY. A 1.5% YoY margin expansion coupled with higher other income and no extraordinary expense during the current year led to higher profit growth of 37% YoY. Profits before tax grew by 22% YoY after adjusting for the same.
What to expect?

At the current price of Rs 1,282, the stock of SKF India is trading at a multiple of about 32.1 times its trailing twelve month earnings and at about 25 times our CY16 estimates.

As per the company, it is still far away from working at full capacity utilization levels with headroom of about 10% to 25% across product lines. Also, while the company does not have major plans for capex anytime soon, it will only look at major spending (plant and machinery only as it has enough land parcels) only when it looks at introducing new products.

While SKF continues its efforts to cut costs, we believe the company's margins are likely to expand much from here on. While lower input costs may provide the company with a fillip in the short run, the real booster for company will company only as the overall industry and manufacturing sector picks up, thereby providing it with an operating leverage. While the company is seeing initial signs of the same, it is still too early to confirm it as a ongoing recovery. Nevertheless, it is seeing signs of optimism amongst its clients.

While a strong bearings players such as SKF India (who is also the largest player in the industry and has a strong track record and a clean balance sheet) deserves higher valuations, we believe valuations at current levels are quite stretched and thus maintain our view of waiting for a good correction before buying into the stock.

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