NRB Bearings - EV and exports to drive growth?

[asarun]

I have been looking at NRB Bearings and invested as well. It’s gone up recently (possibly due to the Thane land sale and good Q4 numbers). Writing up my understanding and analysis of the company and its prospects.

Company Vision: To be a recognized leader in the Design and Production of Customised Friction Solutions, with a presence in every vehicle in the World

Management: Founded by late Mr Trilochan Singh Sahney in 1965, currently Ms Harshbeena S Zaveri, daughter of Mr Trilochan Singh Sahney, is the Vice Chairman and Managing Director of NRB and the Chairman of the Board of SNL. Strong leader who’s been associated with the company for decades, almost starting from the shop floor (somewhat like Siddhartha Lal of Eicher Motors).

Products/Product Profile:

Market leader in needle bearing and cylindrical roller bearing segments - sub-segments include cylindrical roller, special tapered roller and special ball bearing segments.

Full product portfolio includes Drawn cup needle bearings, Cylindrical roller bearings, Planetary shafts and other special pins, Polyamide and steel needle bearing cages, Drawn cup cylindrical roller bearings, Crank pins, Full-complement needle bearings, Special ball bearings, Thrust bearings, Formed strip cages for heavy gearboxes, Tapered and Spherical roller bearings, and Rocker-arm bearings

In FY22, 56% of its sales were of Needle Roller Bushes and Cages, 29% were from Ball and Roller bearings and 15% were from Automobile components. The Company has an estimated market share of 60% in the needle bearing industry in India.

Product Usage

Needle bearings are heavily used in automobile components such as rocker arm pivots, pumps, compressors, and transmissions. The drive shaft of a rear-wheel drive vehicle typically has at least eight needle bearings (four in each U joint) and often more if it is particularly long, or operates on steep slopes

Cylindrical roller bearings are the desired solution for heavy machinery and equipment. They are used in high-speed systems and can be deployed for high-performing systems such as agricultural machinery, wind turbines, mining machines, etc.

Customer Profile

Customers across the entire automobile market (two-wheelers, PVs, CVs, farm equipment & tractors). Large set of customers with no single customer accounting for more than 6-7% of total revenue. Large proportion of revenues from Auto OEMs (both Indian and global). Railways and Defense are also customers.

On the electric side (area of focus for future growth), NRB is exclusive supplier to Ola’s two-wheeler factory and Ola has tapped into NRB for all the customised needle bearings it requires.

The company’s strategy for the future is to have the overseas business largely catering to the EV sector. While its current exports comprise hybrid products and e-drive passenger cars and light, medium and heavy trucks, it will move towards electric powertrains, from the steering, the transmission and e-axle to the braking system. (per Business Line article, but not sure about this).

Revenue and Margins

FY2023 revenue of Rs. 1049 crores (standalone) vs Rs FY2022 revenue of Rs.929 crores. Revenue growth of over 12% in FY23. 65%-70% of revenue from domestic Auto OEMs, 10%-12% from domestic aftermarket, 25%-30% from exports (per CRISIL note)

Increased levels of business from e-mobility segment (per news articles and management commentary) and exports. The share of exports in total revenue stood at 28% in FY22 vs 26% in FY21. Not clear what was the share in FY23.

EBITDA for FY23 at 124 crores vs 97 crores in FY22. Margin expansion in FY23, up nearly 300 bps in Q4 FY23. Operating Margins at 13.7% in FY22 and up to 15.9% in first 9 months of FY23. Overall annualized EBITDA margins will be around 15%, it appears. Elsewhere, I also read that OM is expected to stabilize at 16% - 17% over the medium term, as freight costs and input costs come down/stabilize.

Margin profile could improve based on export mix - “Enhanced product mix and high margins for export sales to Europe and North America for high end new platforms including hybrid and E-mobility” (Q3 FY23 commentary)

Balance Sheet and Cash Flows Profile

Strong net worth of Rs. 616 crores and gearing of 0.41 times as of Sep 2022. Gearing is expected to improve and remain comfortable at 0.2 - 0.4x over the medium term (per CRISIL Credit Rating update).

Interest coverage ratio expected to be over 8.4 times over the medium term.

Annual cash accruals of Rs 120-150 crore over the medium term which should take care of modest capex needs amounting to Rs.45- 55 crore per annum, and debt repayments of Rs. 25-35 crore per annum.

Closed smaller plants (Thane and Aurangabad). Sale of the land will add to balance sheet strength.

R&D/Technology expertise

Well-regarded R&D capability. The company’s product range spans over 3000 designs, which are also made to suit its customer’s requirements. NRB has a dedicated engineering & design (E&D) centre Turbhe, which is recognized by the Indian Department of Science & Technology as a world-class research and development facility. In addition, there is another centre that focusses on process engineering at the plant site in Waluj MIDC.

In 2022, NRB also announced the setting up of a global innovation center for advanced technologies in Dubai, besides additional capex investments in its Thailand subsidiary. Revenue Composition.

R&D spend as % of revenue has increased over time - in FY22, it was at 2.1% of revenue, with R&D expenses of Rs. 19 crores.

Subsidiaries and Related Parties

Primary subsidiary is SNL Bearings - also manufactures needle roller bearings for automotives. Has capability to manufacture its own special purpose machines required for bearing manufacturing (possibly by virtue of its technical collaboration with INA Germany). Was acquired by NRB in 2000. Only manufacturer in eastern India, located at Ranchi. Profitable, exited FY23 with 49 crores in revenue and 11 crores in PBT.

Other stepdown subsidiaries - NRB Holdings Limited (holding company of NRB Bearings Europe GmbH and NRB Bearings USA Inc), NRB Bearings (Thailand) Ltd. Recently, NRB Bearings (Thailand) also became a stepdown subsidiary of NRB Holdings limited (registered in UAE).

Related party is NRB Industrial Bearings - run by the brother of Harshbeena Zaveri. Not profitable and low revenue base. But there are inter-company holdings. Potential risks to capital allocation in future.

Challenges/Issues/Triggers

Working capital intensive operations: From CRISIL note - “The Company imports 25-30% of its raw material requirements of which a major component is imported from Europe and Japan. Due to the just-in-time delivery to OEMs and higher transit for imported raw materials, Company is required to maintain larger inventory and thus has high inventory days at 115-130 days. Furthermore, payment terms from the automotive component manufacturers vary from two to three months, resulting in receivable levels of ~90-110 days.”

Higher raw material prices (steel, primarily) can impact profitability. Currently, stable steel prices at lower levels provide support for improved margins.

Waluj Plant Fire in May 2023. Per what was reported, "An auto-product assembly line was majorly damaged and the fire spread to the adjacent stores department damaging the ready components and other production related stores and spares." Covered by insurance, however overall production at Waluj is likely to be affected for a few months. Recognition of loss from the fire can be expected in Q1 and Q2 of FY24.

Some sluggishness in export market and could worse depending on inflation, geopolitics. Export sales to a large extent dependent on Truck sales trend in America and PV sales trend in the Europe.

Thane Plant land sale recently approved. Could boost bottom line with exceptional income, and also support Capex without need for additional debt.

Management Quotes

“Going ahead, the company will not only focus on products which are EV-agnostic, but also expand to newer areas of business development, including products for steering systems, hybrid and electrical transmission, e-chassis applications and other applications which are for hybrid or electric vehicles. The company is continuously investing in the futuristic products as well as on the future platforms which they are co-developing” (Harshbeena Zaveri)

References

CRISIL Ratings Rationale (March 06, 2023)

FY22 Annual Report

FY23 Quarterly results and Results commentary

NRB Bearing charts 200 crore capex plan (Nov 2021)

HDFC Securities Stock Update for NRB Bearings (April 2023)

Disclosure: Invested a few months ago, at around 150 levels. Evaluating if I should add to my position.

[cabunny]

Thanks for initiating the thread.

Have u gone through receivables management /bad debts provision. Bad debts and provison nos are very high.

[asarun]

Not sure about the past, but in FY23, they have made a provision of Rs 11.2 crore for bad debts, of which Rs. 7.6 crores was in Q4 FY23. It’s lower than the Rs.18.4 crore they had provisioned for in FY22.

Their notes in Q4 results indicate trade receivables for Rs. 50 crores from customers outside India. So while it is high, I assume besides what they have provided for as impairment, the rest will be recovered. If not, yes, we can expect more such provisions.

[cabunny]

According to me making such high percentage of provision ( more than 20 percent in FY 23) shows poor receivables management or there is some gap between sales booking and realisation.

[Surender]

@asarun

Thanks for starting the thread. Since it is making ATH, I looked at fundamentals. They look serene at the face value except 2 things:

1. Growth [in Sales, Operating Profit, and PAT] from FY20 looks good as base numbers were suppressed. However, the same is rewarded as evident from the price action. What are the upcoming OPERATING growth triggers?

Note: Overall sales have not even doubled from FY13 till FY23. Domestic sales seem to be stagnating from FY18 onwards. Q4 results mention that exports are expected to increase, but the statement is not quantifiable.

2. Operating Cash flow compared to Operating Profit has weakened, particularly for the recent 3 Yrs. Any specific reason?
   
   

I assume that you have studied the business before initiating the position and will be able to elaborate on the above points. Thanks.

[asarun]

Yes, I studied the business. Most of my analysis is captured in my original post. I bought in initially because I thought it was undervalued, there was good margin of safety, and the triggers were in place for growth on exports and EV. I also found some comfort in Nalanda Capital having held it for several years (their entry price was very low, of course), which I thought was a good vote of confidence on the management. Low debt was another factor. I also liked their focus on one segment and that they had a wide customer base there. They now seem to be contemplating broadening their portfolio - not sure of where they are on that journey as there is not much news or disclosure about it, but I think it’s a positive. If they execute well, I think this will get rerated even more.

Regarding the domestic sales, well, domestic auto growth has been quite poor anyway. So I don’t see that as an issue. Exports should also be more profitable. Operating cash flow/EBITDA ratio, I am not sure. Good point, I will probably have to study it further. But their OCF numbers in value terms, I expect that it will go up.

Personally, I think the current move up could be due to the land sale in Thane, but who knows, maybe it’s business performance driven only. While I have a reasonable position, would have been nice if I had bought in more given how the share price has shot up! But given what I knew, uncertainty of exports growth, and the uncertainty on the impact of the Waluj plant fire, I am ok with that. I don’t feel like adding now though, it’s run up too quickly. Probably will wait for Q1 results to see what I should do. Win some, miss some!

Let me also say these are just my thoughts currently, and I might change my mind too. Sometimes I book out profits, sometimes I hold on or add. It’s as much what the gut says as it is analytical.

[vikasbargale]

One more BUY-BACK from promoter.

Just sharing.
Any views?

dr.vikas

[asarun]

Promoters bought again on 28th and 29th August though a smaller amount this time. “Edit: Actually, they bought a decent amount - similar to the 24th purchase. I missed one.”

From a business perspective, I am not sure anything has changed. They had a decent quarter, and while their commentary was positive, they also struck a note or two of caution. I have exited a good chunk. I don’t see a fundamental trigger here currently, but maybe I am missing something.

[Rushabh_Doshi]

[kiraank]

Chairman and MD’s AGM speech transcript -

b1b6041d-7377-48bb-80cd-d936bf5180c7.pdf

[vikasbargale]

Recent develpomet in NRB

“dated December 5, 2023, entered into with Oberoi Realty Limited (“Purchaser”)
sold and transferred the land admeasuring approx. 25,700 square meters (as per the Title Deeds)
situated at 2nd Pokharan Road, Majiwade, Thane - 400610 along with building and structures
standing thereon for a consideration of Rs. 196,00,00,000/- (Rupees One Hundred and Ninety Six
crores only).”

Here is the link for the filling

472cae93-02fa-47b8-9111-3ebde2617e71.pdf

Just for sharing

Disc: - Have recently added a 1% position

dr.vikas

[asarun]

NRB ended the day yesterday, quoting at nearly 385. I had exited this fully in late September 2023 when it was in the 280s, and had not paid attention to it after that. Mostly, I sold out between 240 to 280, probably at an average of around 260 or so.

It’s pretty amazing to see that the price now is nearly one-third higher now! I checked the FY24 Q2 results now, and nothing really that stood out. PAT was considerably lower than Q1 though nearly twice that of Q2 of FY23. Revenue growth was also quite marginal. So it’s interesting that the stock has moved up so much even after that. Looking at the charts, I noticed almost all the move up has happened in the last week (40% up in a week)! Hard to know what triggered this up move. I don’t see any major announcement. Guess we will know post Q3 results or maybe it’s just operator action.

Anyway, only reason I am posting is because this made me reflect on my thesis and about my exit. I had initially invested in this with a longer term horizon in mind, but it moved up quite quickly and I ended up exiting as it exceeded my returns target and I didn’t see it offer much more value. Fundamentally, I still think valuation is quite stretched now. I don’t dwell on notional lost profits, but just another insight into why “when to sell” can be such a difficult decision. One’s rationale and thesis might be perfectly ok, but that doesn’t mean one’s sold at the right time.