SKF India - Bearing fruits of MNC Parentage & Industrialization

Overview:

SKF India Limited, incorporated in 1961, is one of India’s leading automotive and industrial products and solutions’ provider. This is a subsidiary of SKF AB - parent company brings 110+ years of its experience to the Indian entity.

Has in-depth knowledge in manufacturing a wide range of products and solutions, for various 40+ industries, which include bearings, seals, and lubrication systems, as well as rotating shaft services and solutions for machine health assessment, reliability engineering and re-manufacturing.

• Has 3 manufacturing locations Pune, Bangalore and Haridwar
• Strong network of 440+ distributors
• Promoter Holding of 52% & enjoys commitment of MNC parent

Positives:

  • Debt free and enjoys healthy ROCE ~>20% 10 years. Spl dividend given so reduced cash balance however has enough reserves and borrowing capacity for any capex

  • Current Drivers : Industrials & automotives. Both OEM & After sales. Sales Mix : H1FY21: Auto - 40%, Industrial - 53%, Exports - 7%

  • Future Drivers: REP, Remanufacturing, Railways, Home automation, aerospace, etc.

  • Well positioned for EV transition (Parent co has proven potential) as well

  • Recent news show 100% utilisation of capacity ##

  • Management team seems professional and has been in news recently for good reasons (won few awards)

    • Bearing - The Indian automotive bearing market in 2019, was valued at INR 70 billion, and is estimated to reach INR 156.8 billion by 2024, registering a CAGR of ~18%, between 2020 and 2024 .( AR - MDA). SKF India has ~25% market share and is a trusted as quality brand. (So much that its counterfeits is a risk)
    • Rotating Equipment Performance (REP) – SKF offers extensive solutions that enable customers to improve their rotating equipment performance, driving business success
    • Remanufacturing, a process of returning a used product to its original performance. SKF has deep experience and knowledge to increase average age of bearings and this could grow as a vertical.
    • Railways - Indian Railways is entering a high-speed era, reducing logistical
    costs and spearheading advanced manufacturing. Several upcoming Metro Rail projects across major cities have piloted and this can open up opportunities for the company.

Financials:

Snapshot of key financial metrics below from latest AR - Given the cyclical nature of Autos and other Industries that the company operates, believe this is well poised for sales and profit growth in the coming years. Also, the fact that most companies are looking for China + 1 supplier can help drive growth in Indian manufacturing that can have a positive impact for company’s growth.

  • Overall increasing trend in EPS although cyclical in nature
  • Steady operating margins
  • Healthy return ratios (ROE & ROCE)
  • List item
  • Special dividend of Rs. 130 /s ha re in July 20 entailing cash outflow of 641 crore, depleting cash reserves. reflects in drop in Other income as well.

Risks:
• Threat of cheaper imports and counterfeit products eating into market share of the company
• Tepid Auto sector and Industrial manufacturing growth, due to muted economic activity, can lead to subdued demand for products and eventually can lead to underutilization of capacities and decline in revenues
• Prolonged COVID impact with lockdowns can delay future investments of its customers (modernization of Railways, infra investment, etc)

Valuations:

Valuations looks bit stretched compared to peers but in comparison with broader index and auto stocks is bit lagging so can add in dips. Also, commands a premium for MNC parentage IMO.

Disclosure : Invested (less than 2% of overall portfolio)
Sources:

recent news on utilization

ICICI Direct report -
https://trendlyne-media-mumbai-new.s3.amazonaws.com/reportPDF/2020-10-29/43937-2435898793ba4037b9e690ed3307335e.pdf?

P.S. This is my very first attempt in publishing analysis of company in VP. Please feel free to add your views to topic. Thanks!

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Thanks for the nice overview post. Do we know about their competitors in the market and also their capacity utilization ?

I glimpsed that the sales growth has been almost flat (3% CAGR in 5 years), their profit growth is also mediocre (6% CAGR in 5 years) and EPS is trending down in last few years. Not sure of the reasons.

Perhaps there is untapped demand since they have hit 100% capacity, what is their capex plan and completion timeline for FY21 ?

The valuation is beyond comfort level at this point

Discl: Not invested

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Thanks for comment - you’re right both sales and profit growth has been mediocre in the past few years. (Am travelling so will update with detailed post later with more facts )

My reading suggests that it is due to lacklustre growth in Autos and Industries. Utilisation seems to be 70% levels per 2019 conference call transcripts. Am not able to find recent transcripts.

In terms of competition, SKF has lion’s market share but looks competitors such as Timken, NRB, etc have posted decent growth figures. I need to dig deep on this.

However, scuttlebutt as well Auto monthly sales in last quarter suggest revival in growth for 2W & 4W. (3W sales are still down). And GST and IIP growth shows turnaround.

Another important factor is that they are getting into services and consultation assignments with Remanufacturing - moving from Capex to Opex which could be game changer given their expertise in bearings and machine mechanics.

On valuations, agree don’t have margin of safety at current levels but don’t expect it to go below 20% of CMP. My holding is less than 2% so can average down during corrections.

Below has some good data and analysis ~

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Managament guidance is positive about growth and margins.

image

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SKF India Partners with IFB for Value-added Product in Non-Automotive Space

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From a 5-10 years view, SKF has 50% revenue from Auto, has to shift revenue mix to to other industries like manufacturing or pression or railway.

As EVs has far lesser moving parts, with very long period for replacement required.

Anti-China sentiment followed by second-sourcing augurs well for precision bearing players as China is the largest supplier today.

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Agree, that’s my impression too. I think SKF management is aligned to this vision from what I’ve gathered so far!

A relative from Calcutta who is into precision engineered tools told last week that post lockdown he is now getting more orders from Europe who were earlier procuring form China, very local but strong signal.

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Good to know. China + 1 is a conscious strategy now to reduced dependency.

SKF India Limited has set up an e-commerce platform for online sale (B2B) of its products. Accordingly, the customers can buy SKF genuine products 24x7 using this platform.

Excellent results!

Both yoy n qoq

Rev at 827cr vs 724cr

PBT at 174cr vs 73cr
Q2 PBT was 84cr

PAT at 128cr vs 51cr
Q2 pat was 65cr

Q3 eps of 26rs vs 10rs
Q2 eps of 13 rs

ICICI Direct revises target to Rs. 2890.

More than TP posting here for their analysis.

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Very insightful observations


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image

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