Timken India (ABC Bearing)

Stock Opportunities
1

Indian Bearing industry comprises of10 major playersand several units in unorganised segment. Due totechnology barriers, the industry isdominated by foreign playerslike SKF, FAG Bearing etc. and hence these players have high margins.

ABC Bearing is one of thelargest player in tapered roller bearingswhich find usage inCV & Tractor industry. ABC has the technological collaboration withNSK, Japanand hence it has also developed a certain market share for itself. The co has a long standingrelationship withautomotive majors likeTata Motors, Ashok Leyland, Mahindra etc.

Comparison Chart:

If one analyses the financials of the company, the company has hadhigh operating marginsin the range of 20-25%. Between FY 2002 and FY 2007, the company had grown steadily from 65 to 182 Cr turnover and had very strong profitability. In FY 2008 & 2009, the CV industry went through a rough phase and so did the company had a decline in turnover and profitability. Now theCV segment is back to strong growthand ABC should do well. Based on the last few quarter numbers, the company is already posting all time high turnover (200 Cr annualised).

Expansions:

  1. The co has constructed anew factoryin Uttarakhand in a record time of 4 months. The plant was inaugurated on 28th March, 2010. This plant will primarily cater to the Ashok Leylandas Uttarakhand plant. Sales growth should start coming up in next few quarters.
  2. The co issetting up another manufacturing facilityfor a Slewing Bearing & Large bearing. This is expected to get completed by end of this year.

Valuations at CMP of 155:

  • For FY 2011, the company is expected to post aturnover of 205 Cr+. i.e… agrowth of more than 25%
  • For FY 2011, the co may be able to post aNP of more than 25 Cr+, hence an EPS of more than 22.
  • Stock is trading at about7 times expected FY 2011 earning.
  • The co has consistent record ofhigh dividend pay-out of 25-30%. Last year the company paid a dividend of 45%.
  • Co has enjoyed highROCE of 30%+ consistently.
  • Its almost adebt free company. Co repaid a loan of about 50 Cr in FY 2010.

If one looks at the valuations of bigger players in the industry like SKF, NRB, FAG Bearing etc, they trade at 15-20 PE.

Given thestrong growth prospects for the company ahead over next 1-2 years, it seems to be a good growth story at attractive valuations.

http://dalaal-street.com/abc-bearing/

2

I also have studied this company and found the valuations attractive at current market price of around 161. The company seems to have a lot going for it in the next few quarters.

3

ABC Bearings has taken a beating post Q2 results. QoQ (Q2vs Q1) there is a decline but overall Q2FY11 has done much better than Q2FY10.

Why is the stock being battered? Its down to Rs.148!

4

Possibly, this is due to the earnings disappointment vs Q1 magnified when compared to the performance of SKF and FAG Bearings which had posted excellent growth over the same period. This might have set the tone of expectations for ABC bearings results -and the stock got dumped on belying these expectations.

Here is some details from ABC Bearings post Link: http://www.rmdhar.com/index.php/2010/10/23/abc-bearings-shares-stock-results-research-risk-reward-ratio-favours-investment-multibagger/ at rmdhar.com

ABC Bearingsâ is quoting at a steep discount to its peers. In addition, ABC Bearingsâ debt-free status, production capacity expansion and expected strong financial performance in the current fiscal make it a good investment bet

ABC Bearings catches the eye because at the CMP of Rs. 157, its shares are languishing at a PE of 8.8 on the basis of the FY 2010 EPS of Rs. 17.79 while its peers are quoting handsome valuations. ABC Bearingsâ peers are FAG Bearings (PE 16.1), SKF India (PE 19.9) and NRB Bearings (PE 28.1). Even Bimetal Bearings (with a smaller market cap of about Rs. 110 crores) is quoting at a PE of 11.4.

So, what is the reason for ABC Bearingsâ gross under-performance in comparison to its peers? There are no obvious pointers to ABC Bearingsâ undervaluation. ABC Bearingsâ annual accounts show that its performance has been a bit erratic. The sales reached a peak of Rs. 215.91 crores in FY 2006-07 and then declined to Rs. 195.38 crores, 153.26 crores and 177.38 crores in FY 2007-08 to 2009-10 respectively. ABC Bearingsâ profits have also been zigzagging over the past few years.


Abc Bearings

ABC Bearingsâ had a rough time in FY 2009-10 due to the slow down in the Indian and World economy. ABC Bearingsâ customers reduced production forcing ABC Bearingsâ to reduce its production and saddling it with huge inventories of raw material and finished goods. However, this was true for all other companies in the Auto Industry.

Update: ABC Bearingsâ Q2 FY 2011 results:

ABC Bearingsâ Q2 FY 2011 results were good on a YOY basis though disappointing on a Q-o-Q basis.

ABC Bearingsâ sales in Q2 FY 2011 rose to Rs. 40.28 crores as compared to Rs. 38.60 crores in Q2 FY 2010. However, this marks a fall from the Q1 FY 2011 sales of Rs. 48.37 crores.

Likewise, ABC Bearingsâ Net Profit in Q2 FY 2011 was higher at Rs. 5.02 crores as compared to Rs. 3.76 crores in the same Quarter last year though this was lower than the Net Profit of Rs. 5.92 crores that ABC Bearingsâ reported in Q1 FY 2011.

ABC Bearingsâ diluted EPS in Q2 FY 2011 was Rs. 4.35. While this was higher than the Rs. 3.26 that ABC Bearingsâ reported in Q2 FY 2010, it is lower than the Rs. 5.13 that ABC Bearingsâ reported in Q1 FY 2011.

The reasons for the fall appear to be some teething problems with the new plants that ABC Bearingsâ has set up in FY 2010-11. These may well be temporary problems and one should take advantage of the fall in stock price to buy the shares of ABC Bearings.

ABC Bearingsâ past statistics are not very impressive either. ABC Bearingsâ 3 year CAGR sales showed a de-growth at 4.12% while the 3 year CAGR profit showed a decline of 9.58%. However, thanks to ABC Bearingsâ small equity of 11.55 crores, the ROE is a healthy 20%.

ABC Bearingsâ Quarterly Performance

(Rs cr) Jun 2010 Jun 2009 YOY
Operating Income 48.96 30.37 61.21
Total Expenses 39.34 26.33 49.41
Operating Profit 9.62 4.04 138.12
Other Income 0.04 0.08 -50.00
PBDIT 9.66 4.12 134.47
PBT 8.61 3.68 133.97
Adjusted Net Profit 5.92 2.43 143.62

ABC Bearingsâ results for Q1 FY 2011 were quite impressive. ABC Bearingsâ operating income spurted 61% to close at Rs. 48.96 crores while the net profit showed an impressive 143.62% increase to close at Rs. 5.92 crores as compared to last years Q1 of Rs. 2.43 crores. The other noteworthy aspect is that while ABC Bearingsâ had loans of Rs. 52.91 crores in FY 2008-09, that was reduced to Rs. 4.56 crores in FY 2009-10 resulting in a minuscule debt-equity ratio of 0.05.

ABC Bearingsâ Peers
Company Name LTP
( Rs )		 M.Cap.
( Rs in Cr.)		 P/E
(x)		 P/BV
(x)		 RONW
(%)
SKF India 564.15 3,067 19.9 4.29 13.86
Fag Bearings 876.90 1,442 16.1 3.13 15.20
Timken India 194.85 1,258 28.7 3.81 10.38
NRB Bearings 53.70 528 28.1 3.00 12.80
Bimetal Bearings 293.10 111 11.4 0.91 7.51

The other positive trigger for ABC Bearingsâ stock is that it has expanded its operations and constructed a new factory in Uttarakhand which commenced commercial production on 28th March 2010. According to ABC Bearings, this factory will cater to the requirements of the customers in Uttarakhand, especially, Ashok Leyland, Tata Motors Limited and those industries, which do not attract excise duty on their end products such as the Tractor industry. ABC Bearings has also revived itsâ Slewing Bearing and large bearing project. The commercial production of the Slewing Bearing Plant is expected to start in the later part of this year. ABC Bearings will show the full profitability of the Uttarakhand factory as well as the Slewing Bearing Plant in the current fiscal year 2010-11.

So, ABC Bearings has a lot of things going for it. A booming auto Industry means greater demand for bearings. ABC Bearings has a technical collaboration agreement with NSK of Japan which ensures that it gets cutting edge technical know-how. ABC Bearingsâ balance sheet is in good shape with reserves of Rs. 79.21 crores and an almost debt-free status. ABC Bearings is also quite generous with its dividends, paying out 45% last year (face value Rs. 10) resulting in a payout of Rs. 5.19 crores. At the present CMP, ABC Bearings offers a dividend yield of about 2.8%.

ABC Bearings has not announced its Q2 FY 2011 results yet (now announced â see above) but if the results of its peers FAG Bearings and SKF India are an indication, the strong performance on the financial front will continue.

ABC Bearings certainly appears to a good investment having regard to the risk-reward ratio. The risks of investment in ABC Bearings are minimal. On the other hand, the incremental production without dilution of equity ought to be EPS accretive. If ABC Bearingsâ valuations catch up with that of its peers FAG Bearings, SKF India and NRB Bearings ABC Bearings could be a multibagger.

5

ABC Bearings in my view needs to prove itself for getting a rerating from the markets. If it delivers good results in next 2-3 quarters as expected then I think as mentioned by arindam, this could be atleast a comfortable two bagger. There seems to be very little to assume poor results in next few quarters looking at the growth shown by user industry which is commercial vehicles and tractors. One needs to have the conviction to hold on and add on declines with this company.

6

Hitesh,

at 145 CMP, there looks to be good value?What are the charts saying for ABC Bearings, currently?

7

I have reduced my exposure here at around 152-155 levels.

Reason - We need to understand as to why the growth is not coming in. Almost every other autoancillary co has done well.

So the stock may react in between.

Regards,

Ayush

PS: I may be wrong here as over the longer term the outlook is positive.

8

value?What

Retracement levels of the rise from around 100 levels to the recent high of around 180 comes to around 141 for 50% retracement and around 132 for 61.8% levels. 127 is the all important 200 day exponential moving average.

On rises from now on around 157-160 levels could now act as a resistance because these were the levels where support used to come in earlier.

Stock seems to be in short term to medium term downtrend. Long term looks good. Current quarter seems to be a temporary blip in the overall good picture.

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9

**

Hitesh,

ABC Bearings jumped 12% today to exactly 157!

-Donald

On earlier.

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10

Parag Parikh financial services (who are known to be value investors) has come out with a buy call on ABC Bearings at cmp of 138 today in their weekly report. No targets specified. Some highlights of their report.

Strong Turnaround Story:

ABC Bearings Ltd. (ABCL) has made a strong turnaround in FY10, riding

on the auto sector boom and economic revival. The company has reported

a profit of 205Mn as against66Mn for FY09, clocking a growth of 212.5%

after adjusting for an one time exceptional item. Efficient working capital

management, utilization of cost-effective measures, reduction of excess

work force and repayment of expensive loans has assisted the company to

put itself in the black.

Leading Player:

The company is one of the leading players in tapered roller bearings,

catering mainly to the M&HCV and tractor segments. The product portfolio

consists of taper roller bearings, cylindrical roller bearings, spherical roller

bearings and grease. ABCL is also the leading OEM (original equipment

manufacturers) supplier to the automotive industry in the country and

overseas.

Capacity Expansion:

Currently the company’s manufacturing capacity is at 7.2Mn bearings per

annum at Bharuch, Gujarat. This excludes the new manufacturing capacity

at Dehradun, Uttarakhand, which has commenced production from March

2010). It is also setting up another new manufacturing capacity for Slewing

bearings and large bearings, which will be completed by this year end. This

will be a strong growth factor over the next 2-3 years.

Our Call:

At CMP of `138.8/- ABCL is trading at a huge discounted P/E (as compared

to its peers) of 6.3x its FY11E earnings of `22/- per share. We initiate

coverage on the scrip with a ‘BUY’ recommendation.

11

After the fall from the 165 levels to 132 post the second quarter results, the stock retraced back to 165 within only 3 trading sessions whereas earlier fall had taken around 8-9 trading sessions. This in technical analysis terms is called faster retracement. This lends some bullish strength to the stock provided the earlier bottom of 132 holds out. In this mayhem in the last 3-4 sessions, the stock has not violated the bottom so there could be some upsides coming. Fingers crossed. I am holding on.

12

Yeah good to see PPFS initiating coverage of ABC , as they have a very good track record of Value Picks. Another point that i have come across through some research report is that this is the 50th year of operation for ABC & hence we can expect a liberal dividend & also maybe a bonus. If that happens it should be a good trigger for the stock. I have been accumulating on dips.

13

Thanks Hitesh. I have accumulated more in this correction.

No reason why ABC bearings should not catch up with its peers on Valuation, sooner than later.

Siddharth - I too like the dividend play here. they are consistent dividend payers.

14

Another aspect of ABC Bearings which I might probably have mentioned earlier. The company had its plant earlier on the outskirts of Bharuch just adjacent to GNFC premises. Now it happens that the city has expanded and the current location of the factory is at a fantastic location on both sides of the road which acts as a bypass from Bharuch highway to Dahej which is a big industrial zone in gujarat. Now since I commute almost twice a month to Bharuch, I can see that the area surrounding the ABC Bearings factory has become a full fledged residential zone and one can only hazard a guess at the valuation of the prime land on which the factory premises is located. The value of land in AR FY 10 has been shown at around 5 crores. So one can only guess the current market value of the land.

Book value of the company is around 80 but this must be with land valued at historical prices.

My guess is that based on the company’s location in Bharuch, the stock is available comfortably below the replacement cost of the company.

**The above premise does not put forward any land bank argument. But this is an effort to put a valuation to the company based on Graham like concept of liquidation value so that we can be sure that this is indeed a value buy which I strongly feel it is at current price of around 135-136 with total market cap of around 158 crores. I feel we are getting something worth 1 rupee for around 75 paise or less here. **

This could also qualify as one of the stocks which can be placed in Donald’s section of long term bets because it looks like a great value play along with good growth prospects.

15

http://www.business-standard.com/india/news/mckinsey-predicts-80-growth-in-auto-aftermarket-by-2015/415923/

16

Q3 Results were out today (http://www.moneycontrol.com/livefeed_pdf/Jan2011/ABC_Bearings_Ltd_180111_Rst.pdf). While Sales were up at 46.6Crs vs 41.2 Crs in Dec 2009 . the Net Profit was down at 6.44Crs vs 7.79 Crs. However in Q3 last year they had Exceptional items worth 5crs which translated to about 3.3-3.5 crs to bottom line which means actual profit was about 4.5 Crs. So actual EPS growth is around 43%. We are looking at about 22-25 crs Net profit this fiscal which makes the stock appear cheap at around 6 P/E.

17

I also had a look at the results and seem quite good. On first look bcos of the extraordinary item of 5 crores during last year, the net profit growth looks bad but if one were to compare the operating profit, the correct picture would emerge.

Sales up to 46 crores in q3 fy 11 vs 40 cr in q3 fy 10

PBIDT up to 9.73 cr vs 7.18 crs

For nine months,

9M fy 11 sales at 134 cr vs 9m fy 10 sales of 100 crores

9m fy 11 pbidt at 25.95 cr vs 9m fy 10 pbidt at 16.77 cr.

9m eps at 15 per share (not annualised)

At cmp of 125 odd certainly looks attractive for a debt free company with good growth prospects and good dividend payuout.

18

Bearish Argument

Hello friends. I have checked ABC bearings and what you guys say is true to the extent of it having a good ROCE etc.

However it seems to me that they are dependent on the auto CV segment. So it does have a some cyclical tendencies since fortunes are tied with the CV segment.? Can we expect year on year growth in this? Pls educate me.

How much percentage of the sales is replacement demand and how much is OEM sales?

or does this has cyclical tendencies like cement, steel etc?

SKF and FAG bearings have a huge percentage of sale in aftermarket or replacement that cushions them from the cyclical tendencies of auto sector (to some extent)

Any light thrown on this issue would be useful.

Management

Can somebody educate me whether the management is good allocator of capital (a.k.s Buffet test) and whether these are honest guys and do not misplay with minority shareholders?

Sameer

19

Hi Sameer,

My initial pick on ABC was more due to valuation gap and expectation of growth coming in. Seeing consistent delays, I had exited the stock.

Anytime SKF and Fag are much much better players but taking about their stock potential, they usually remain fairly valued.

Regards,

Ayush

20

Hi, Is anybody holding / tracking this Company or all quitafter Ayush?

Stock is not going anywhere.

Regards

Prashant