Result Update February 13, 2015

Rating matrix Rating : Buy NRB Bearings (NRBBEA) | 144 Target : 165 Target Period : 12 months Potential Upside : 14% Well positioned for growth… What’s changed? Target Unchanged • NRB Bearings reported a healthy set of standalone numbers, which EPS FY16E Unchanged were largely in line with our estimates EPS FY17E Unchanged • The standalone topline came in at | 166.4 crore (up 10.3% YoY), Rating Unchanged which was a tad lower than our estimate of | 169 crore. In terms of Quarterly performance segmental composition, the domestic OEM segment formed 60% of Q3FY15 Q3FY14 YoY (%) Q2FY15 QoQ (%) the topline, followed by exports that now form 26% of the topline. Revenue 166.4 150.9 10.3 176.2 -5.6 The aftermarket segment formed the remaining 14% of the topline EBITDA 30.4 26.1 16.7 32.8 -7.4 • The EBITDA witnessed 16.7% YoY growth to | 30.4 crore on account EBITDA (%) 18.3 17.3 101 bps 18.6 -36 bps of a 100 bps improvement in EBITDA margin to 18.3% (largely in line PAT 12.3 8.7 41.4 15.0 -17.6 with our expectations)

Key financials (Consolidated) • Consequently, standalone PAT posted 41.4% YoY growth to | 12.3 | Crore FY14 FY15E FY16E FY17E crore against our expectation of | 12.2 crore, aided further by lower Net Sales 607.5 700.4 835.1 982.7 tax rate of ~30% vs. our expectations of ~33% EBITDA 103.1 128.2 162.9 199.7 Leading bearings manufacturer with focus on cylindrical & needle bearing Net Profit 33.0 45.5 66.2 89.1 EPS (|) 3.4 4.7 6.8 9.2 NRB is the leader in the needle bearing segment in India with ~70%

market share. Needle roller bearings constituted ~55% of NRB’s topline Valuation summary (Consolidated) in FY14. A needle roller bearing, as a customised product, requires NRB FY14 FY15E FY16E FY17E to work with OEMs from the conceptualisation stage. This enables it to P/E 42.3 30.7 21.1 15.7 build sticky clientele relationships with almost all major OEM players. Target P/E 48.6 35.3 24.2 18.0 Apart from needle bearings, cylindrical bearings are the other key product EV / EBITDA 16.5 13.2 10.3 8.4 with needle and cylindrical bearings together forming ~68% of topline. P/BV 6.4 5.6 4.7 3.8 RoNW (%) 15 18.1 22.1 24.4 Revival in auto volumes to boost NRB’s fortunes RoCE (%) 12.6 15.2 19.0 22.5 For 9MFY15, auto volumes have recovered with 11.6% growth (mainly Stock data driven by two-wheeler segment growth, which was up 13.7% YoY). With Particular Amount the auto industry finally showing signs of a recovery after nearly two Market Capitalization | 1395.7 Crore years of a demand slump coupled with a strong launch pipeline and Total Debt | 316.2 Crore product refreshes, we expect bearings demand from the OEM segment to Cash and Investments | 5.8 Crore pick up significantly. Therefore, net revenues from the OEM segment are EV | 1706.2 Crore expected to grow at 15% CAGR during FY14-17E to | 560 crore. 52 week H/L (|) 147 / 36 Equity capita | 19.4 Crore Strong exports presence… Face value | 2 To expand its geographical footprints and foray into newer platforms, Price performance NRB has forayed into exports wherein it caters to global players such as 1M 3M 6M 12M Daimler, Renault, Volvo and Getrag. NRB’s exports, which grew at 25.7% NRB Bearings (2.8) (5.8) 38.1 254.8 CAGR over FY09-14, have also provided a natural hedge for its import of Fag Bearings 7.4 23.4 37.5 133.1 raw materials. Exports, which formed ~7.6% of the topline in FY10, SKF India 4.2 3.3 25.2 115.3 constituted ~23.3% of revenues in FY14. The segment’s performance has

continued to be sturdy with exports now forming ~26% of the topline as

Research Analyst on 9MFY15. We expect NRB’s export revenues to grow at 23.3% CAGR in FY14-17E to | 260 crore in FY17E. Chirag J Shah [email protected] Strong earnings growth to boost valuations… Bhupendra Tiwary [email protected] We believe NRB would be one of the key beneficiaries of the automotive sector recovery, given its leadership position in the needle roller bearings

space with a pure play in the mobility segment and strong consolidated earnings growth at 39.3% CAGR in FY14-17E. We maintain our BUY rating and ascribe a multiple of 18x (at ~30% discount to SKF) on the FY17E consolidated earnings to arrive at a valuation of | 165/share.

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Variance analysis Year Q3FY15 Q3FY15 Q3FY14 YoY (%) Q2FY15 QoQ(%) Comments Income from Operation 166.4 169.0 150.9 10.3 176.2 -5.6 The topline was a tad lower-than-expected Other Income 0.2 0.8 0.0 1,000.0 1.4 -83.9

Cost of material consumed 67.2 72.7 63.7 5.4 73.6 -8.8 Stores & spares 11.6 11.1 12.4 -6.3 11.5 0.4 Change in inventory 0.3 -0.2 -3.2 NM -0.2 NM Employee cost 24.8 24.4 25.0 -0.6 25.5 -2.5 Other expenditure 30.4 29.8 28.3 7.5 31.1 -2.2 EBITDA 30.4 30.9 26.1 16.7 32.8 -7.4 Margins were largely in line with our estimates EBITDA Margin (%) 18.3 18.3 17.3 101 bps 18.6 -36 bps

Depreciation 9.1 9.5 8.5 7.3 8.8 3.8 Interest 4.0 4.0 4.4 3.7

PBT 17.6 18.2 13.2 32.7 21.7 -19.1 Taxes 5.2 5.9 4.5 15.9 6.8 -22.5 PAT 12.3 12.2 8.7 41.4 15.0 -17.6 PAT was in line with estimates aided by lower tax rate Source: Company, ICICIdirect.com Research

Change in estimates FY16E FY17E (| Crore) Old New % Change Old New % Change Revenue 835.1 835.1 0.0 982.7 982.7 0.0 EBITDA 162.9 162.9 0.0 199.7 199.7 0.0 EBITDA Margin (%) 19.5 19.5 0 bps 20.3 20.3 0 bps PAT 66.2 66.2 0.0 89.1 89.1 0.0 EPS (|) 6.8 6.8 0.0 9.2 9.2 0.0

Source: Company, ICICIdirect.com Research

Assumptions Current Earlier | crore FY14 FY15E FY16E FY17E FY16E FY17E Comments Domestic OEMS 368.6 416.5 491.5 560.3 491.5 560.3 Assumptions Unchanged After market Sales 87.2 100.3 115.3 138.4 115.3 138.4 Exports 138.7 166.4 208.0 260.1 208.0 260.1

Source: Company, ICICIdirect.com Research

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Company Analysis

Strong clientele base – Presence, diversification Presence across major OEM players, new segments to open up opportunities NRB is present across the auto OEM space through its exposure to the two-wheelers, four-wheelers, commercial vehicles (CV), passenger vehicles (PV) and off highway segments. With a proven track record over 49 years, it is a preferred supplier to leading domestic OEMs such as Hero MotoCorp, , Maruti Suzuki, Tata Motors, Ashok Leyland, etc. which is clearly depicted in the staggering 70% market share commanded A needle roller bearing is a customised product. Hence, the by the company in the needle roller bearings space. A needle roller company works with OEMs from the conceptualisation bearing is a customised product. Hence, the company works with OEMs stage to provide anti-friction solutions from the conceptualisation stage to provide anti-friction solutions. This enables NRB to build a sticky clientele relationship with major OEM players.

Apart from the automotive segment, the company also enjoys a presence in the race boats segment wherein Ingersoll Rand is one of the key customers. Furthermore, NRB has also outlined growth opportunities in other mobility segments such as defence in the form of gun carriers, marine, Railways and MRTS wherein rising investment could open up avenues for bearings demands.

NRB, whose domestic automotive segment, forms ~62% of the topline, caters to almost all segment viz. two-wheelers (33% of revenues), CV (19% of revenues), PV (20% of revenues) and farm/off highway (forming 10% of revenues). Domestic automotive OEM revenues of NRB have grown at 14.3% CAGR during FY09-14 to | 368.6 crore.

Exhibit 1: Key customers of NRB Category Key customers Two-wheeler OEMs Hero MotoCorp, HMSI, Bajaj Auto, TVS Motor PV Maruti Suzuki, Tata Motors CV/Utility vehicle Mahindra & Mahindra, Ashok Leyland

Source: Company, ICICIdirect.com Research

Diversified client base=low concentration risk NRB’s client portfolio is well diversified with the average share of the top customer over FY09-14 at ~9% of revenues. NRB’s top customer had 9.6% share in FY14 revenues. The contribution of NRB’s top 10 clients is at ~54% of the topline. The company also indicated that the constituents of the top 10 keep on changing based on the individual segmental growth.

NRB’s client portfolio is well diversified with the average share of top customer over FY09-14 at ~9% of revenues Exhibit 2: Top clients do not have more than 10% of topline share

60.0 54.2 49.1 50.7 44.0 43.0 41.0 39.3 35.0 34.9 40.0 31.0 33.0 30.7

20.0 8.0 10.0 9.0 8.6 8.9 9.6

0.0 FY09 FY10 FY11 FY12 FY13 FY14 Top customer Top 5 customer Top 10 customer

Source: Company, ICICIdirect.com Research

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Automotive segment recovery to boost demand… Auto OEMs form 62% of NRB’s topline… NRB caters only to the mobility segment post the demerger of NRB Industrial Bearings. The automotive OEMs segment is the biggest contributor to revenues (forming 62% of revenues) followed by aftermarket (forming ~15% of revenues) and exports that form ~23% of revenues. It should be noted that NRB caters to almost all segments of the automotive sector viz. two-wheelers (33% of revenues), CV (19% of revenues), PV (20% of revenues) and farm/off highway (forming 10% of revenues). Domestic automotive OEM revenues of NRB have grown at 14.3% CAGR in FY09-14 to | 368.6 crore. It is noteworthy that NRB’s auto OEM revenue growth is identical to the overall auto sales volume growth of 13.8% CAGR in the same period, thereby clearly reflecting the strong correlation between the two. Exhibit 3: Domestic OEMs form 62% of topline Exhibit 4: NRB caters to all automotive segments Farm/Off 100 Highway 90 19.2 19.5 17.3 16.0 14.1 14.7 Others 10% 80 18% 70 60 64.4 62.0 50 65.5 71.0 (%) 72.9 74.0 40 2W 30 PV 33% 20 20% 10 21.6 23.3 15.3 8.7 13.0 0 7.6 FY09 FY10 FY11 FY12 FY13 FY14 CV Exports Domestic OEM Aftermarket 19%

Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research

NRB OEM segment moves in tandem with industry sales volumes… Revenue growth of NRB’s auto segment has mimicked overall auto sales NRB’s auto OEM revenue growth of 14.3% in FY09-14 is volumes. It is noteworthy, for the year, wherein auto volumes jumped identical to the overall auto sales volume growth of 13.8% sharply. NRB had shown a similar sharp uptick. For example, in FY10 and CAGR during the same period, thereby clearly reflecting the FY11, when overall auto volumes grew ~25% and 26% YoY, respectively, strong correlation between the two NRB’s auto segment grew ~34% and ~38% YoY, respectively. Similarly, during the challenging times for the automotive segment (muted 2% and 4% YoY growth in FY13 and FY14, respectively), NRB’s auto segment declined at 4% and 1% YoY in FY13 and FY14, respectively, exhibiting a strong correlation. Going ahead, we expect the OEMs segment to witness ~15% CAGR over FY14-17E, in tandem with overall auto sales volumes. Exhibit 5: Auto sales growth and NRB auto OEM segment revenue growth trend

45.0 33.7 38.3 35.0 25.0 25.3 18.0 13.0 14.0 26.0 14.2 18.0 15.0 13.0 14.0 11.6 (%) 1.9 4.0 5.0 3.3 -1.2 -5.0 -4.3 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 -15.0 -19.7 -25.0 Auto OEM Segment (YoY) Auto Volumes (YoY)

Source: Company, Bloomberg, ICICIdirect.com Research

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Two-wheelers – Only resilient segment in last two year’s slump… Over the last two years, the sales volumes of the automotive sector have been sluggish given the macro headwinds such as overall slowdown in The two-wheeler segment has been resilient during the economic activity, elevated interest levels etc. While the worst hit challenging times. It has grown at 2.7% and 7.2% in FY13 segment has been CV, the sales volume of which is directly linked with and FY14, respectively, vis-à-vis overall sales volume overall economic activity, the two wheelers segment has been resilient growth of 1.9% and 4%, respectively in FY13 and FY14 during the challenging times. It has grown at 2.7% and 7.2% in FY13 and FY14, respectively, vis-à-vis overall sales volume growth of 1.9% and 4% in FY13 and FY14, respectively. Going ahead, two-wheelers with 15% and 20% growth in FY15E and FY16E, respectively, will be the key driver for the first leg of auto growth. On the other hand, a PV and CV recovery is expected to kick in from FY16E onwards with a pick-up in economic growth coupled with benign interest rates. Consequently, in FY16E and FY17E, PV volumes are expected to grow at 15% and 14%, respectively, while CV volumes are expected to post growth of 18% & 20% in FY16E & FY17E, respectively.

Exhibit 6: YoY growth of auto volumes - segment wise

40.0 35.1 31.2 30.0 27.0 29.7 24.5 26.3 19.0 20 22.9 20.0 23.3 15 18 20 15.9 15 16 15 14 10.0 9.9 2.7 13 7.2 9 12

(%) 6.5 2.4 0.0 -3.2 -1.0 0 -3.8 -10.0 -4.3

-20.0 -18.7 -30.0 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E PV CV 3 wheelers 2 wheelers

Source: SIAM, ICICIdirect.com Research

Partnering with winners boosts NRB NRB has also benefited from partnering with players that have not witnessed a sharp decline in volumes. For example, the company has had an association with HMSI and Hero MotoCorp in the two wheeler segment that has grown at a superior rate vis-à-vis Bajaj Auto, which has declined. Similarly, it has also benefited from its association with Honda Cars India, which has witnessed handsome growth in FY14 vs. decline/muted growth by players such as Maruti, M&M, etc.

Exhibit 7: NRB’s domestic sales volume vs. production volume growth of key customers Production YoY (%) FY10 FY11 FY12 FY13 FY14 Honda Cars India Ltd 40.3 -8.0 -18.2 49.7 82.5 Maruti Suzuki India Ltd 32.7 23.9 -10.9 3.1 -1.3 Hero Motocorp 23.4 17.6 16.1 -3.4 2.9 HMSI 19.3 29.2 27.9 30.5 35.4 India Yamaha Motor 32.8 27.6 37.5 0.8 35.0 NRB Bearings 33.7 38.3 11.6 -4.3 -1.2 Source: Company, SIAM, ICICIdirect.com Research

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Early signs of auto revival + strong launch pipeline augur well for ancillary demand With the auto industry finally showing signs of a recovery For YTDFY15, the auto sector has shown signs of a recovery with 11.6% after nearly two years of a demand slump, new launches growth (mainly driven by two wheeler segment growth that was up and product refreshes will further drive the growth ahead 13.7% YoY).

With the auto industry finally showing signs of a recovery after nearly two years of a demand slump, new launches and product refreshes will further drive the growth ahead.

We believe macro headwinds like currency, interest rate and inflation would also turn positive and boost the industry on the back of an improvement in overall economic activity. Going ahead, we expect overall domestic auto growth of 13%, 18% and 14% YoY for FY15E, FY16E and FY17E, respectively. Exhibit 8: Recovery seen in FY15YTD led by two-wheelers segment

20 17.2 13.7 15 11.6 10 2.7

5 (%) 0 Overall 2 wheelers 3 wheelers CV PV -5 -5.0 -10

Source: Bloomberg, ICICIdirect.com Research

NRB’s domestic OEMs set to grow at ~15% CAGR over FY14-17E We expect NRB’s domestic OEM segment revenues to post ~15% CAGR over FY14-17E, in line with overall auto growth assumptions. Consequently, net revenues from the OEM segment are expected to grow from | 369 crore in FY14 to | 560 crore in FY17E.

We highlight that our revenue assumption for NRB’s domestic OEM segment is largely based on the overall domestic auto growth assumptions of ~15% CAGR during FY14-17E. Furthermore, we also derive comfort from the huge launch pipeline in four-wheelers (24 launches/refreshes in the next two years) and two-wheelers space (35 launches/refreshes in the next two years).

Our revenue assumption for NRB’s domestic OEM segment Exhibit 9: NRB’s OEM segment revenues trend is largely based on overall domestic auto growth 600 560 20 491 assumptions, which are 13%, 18% and 14% for FY15E, 500 417 15 FY16E and FY17E, respectively 390 373 369 400 10

300 (%)

| crore 5 200 100 0 0 -5 FY12 FY13 FY14 FY15E FY16E FY17E Domestic OEMs YoY (%)

Source: Company, ICICIdirect.com Research

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Exhibit 10: Launches by various automakers Company Launch Plans Two wheelers Hero MotoCorp 10 launches/refreshes over next two years including Dare, Dash, Leap in the scooter segment and HX250R in motorcycles Bajaj Auto Two new Pulsar and one Discover variant in next year TVS Motors Two commuter bikes, one scooter and refreshes HMSI Honda CBR300 and one commuter bike over the next year Two new scooters and two bikes launched Four wheelers Maruti Suzuki Launches in the form of Dzire and Swift facelift and new products like XA Alpha and S-Cross SX4 Tata Motors Bolt and Nano Diesel M&M Two UVs in the compact SUV segment, one LCV, Scorpio refresh and other facelifts Hyundai Refreshes of existing products Honda Vezel in the SUV segment and the new Jazz Nissan Datsun Go Plus & Datsun Go Sedan

Source: ICICIdirect.com Research

Exhibit 11: Upcoming launches for car and bikes Upcoming car Launches Upcoming bike launches Mahindra Scorpio Facelift Renault Lodgy Kawasaki Z250 Hero Dare Hero Leap Hybrid SES Fiat Avventura Ford Ka Mahindra Gusto SS200 Bajaj Pulsar CS400 Maruti Suzuki Ciaz Volkswagen Taigun Vespa 946 Vespa Fly125 Hero ZIR Renault Duster AWD Datsun Redi GO Pro Classic Yamaha YZF R25 Honda CBR 650F Maruti Suzuki Swift Facelift Maruti Suzuki S-Cross SX4 Kawasaki Versys 1000 Mahindra Mojo 300 Honda CBR300R Maruti Suzuki Swift Dzire Facelift Toyota Vios Bajaj Pulsar 180NS Hero Dash Suzuki Gladius 650 Volkswagen Vento Facelift Honda Jazz Hero Xtreme Sports 250 Hero RNT Ford Figo Concept Sedan Ford B-MAX MPV Piaggio Liberty 125 Harley Davidson Street 500 Yamaha Ray 125 Tata Bolt Datsun Go Plus Bajaj Pulsar 200NS FI Honda CB500X Honda PCX125 Skoda Octavia vRS Renault Duster Facelift Bajaj Pulsar 150NS Hero HX250R KTM 390 Adventure Mahindra Quanto AT Mahindra XUV500 Hybrid Kawasaki ER-6n Honda CB500F Hero Hastur Mahindra S101 Fiat Punto Abarth Bajaj Pulsar SS400 Honda CBR500R

Source: www.carwale.com, www.bikewale.com, ICICIdirect.com Research

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De-risked geographical presence through strong exports… To expand its footprint and foray into newer platforms, NRB has concentrated on exports wherein it caters to global players such as Daimler Trucks, Renault, Volvo and Getrag. With a focus on exports, the company has demonstrated a strong exports performance. Its export revenues have grown at 25.7% CAGR over FY09-14. The company’s export, which formed ~7.6% of topline in FY10, constituted ~23.3% of revenues in FY14, thus enabling NRB to combat the domestic slowdown. The segment’s performance has continued to be sturdy with exports now forming ~26% of the topline as on 9MFY15. According to the company, its focus on exports by the way of working from the conceptualisation stage given its customised product offerings has enabled it to strengthen its foothold in the export market. Given the fact that NRB is one of the few global players (INA, Koyo and NSK) producing needle roller bearings coupled with the technology at par with MNCs, export earnings are expected to remain robust. Going ahead, we expect NRB’s export revenues to grow at 23.3% CAGR over FY14-17%. Consequently, the share of export revenues is expected to grow to 27% of revenues in FY17E. Going ahead, we expect NRB’s export revenues to grow at Exhibit 12: NRB’s export revenue trend 23.3% CAGR over FY14-17%. Consequently, the share of export revenues is expected to grow to 27% of revenues in 300 80 FY17E 260.1 70 250 208.0 60 200 166.4 50 138.7 150 124.9 40 (%) | crore 30 100 71.6 41.1 20 50 10 0 0 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

Exports YoY (RHS)

Source: Company, ICICIdirect.com Research

Exhibit 13: Export as a percentage of revenues

30.0 27.1 25.0 25.5 23.3 24.4 21.6 20.0

15.0 (%) 13.0 10.0 7.6 8.7 5.0

0.0 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

Source: Company, ICICIdirect.com Research

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Consolidated revenues to grow at 17.4% CAGR during FY14-17E NRB’s consolidated revenues grew at 14.6% CAGR in FY10-14. While the topline growth during FY10-12 was at 26% CAGR, it dipped to 4.2% in FY12-14 owing to the overall slowdown in automotive sales volumes. The initial signs of a recovery coupled with a strong launch pipeline bode well for NRB, going ahead. We build in an overall consolidated revenue growth of 17.4% CAGR over FY14-17E. The domestic OEM segment is expected to grow at 15% CAGR over FY14-17E while aftermarket and exports are expected to exhibit 16.6% and 23.3% CAGR, respectively, over FY14-17E. With the superior exports growth vis-à-vis the OEM and aftermarket segments, we expect the share of exports in the total topline to inch up to 27.1% in FY17E vs. 23.3% in FY14.

We build in an overall consolidated revenue growth of Exhibit 14: Consolidated revenue growth trend 17.4% CAGR over FY14-17E

1,120 983 960 835

800 700 592 607 640 480 (| crore) 320 160 - FY13 FY14 FY15E FY16E FY17E

Source: Company, ICICIdirect.com Research

Exhibit 15: Standalone topline to grow at 17.3% CAGR during FY14-17E Exhibit 16: Share of exports to rise with robust export growth

959 100 1,000 14.1 14.7 14.7 14.2 14.4 815 80 800 683 594 580 60 600 64.4 62.0 61.0 60.3 58.4 (%) 400 40 (| crore) 200 20 21.6 23.3 24.4 25.5 27.1 - 0 FY13 FY14 FY15E FY16E FY17E FY13 FY14 FY15E FY16E FY17E

Exports Domestic OEM Aftermarket

Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research

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Consolidated EBITDA to grow at 24.6% CAGR during FY14-17E NRB’s consolidated operating profit grew at 17.1% CAGR during FY10-14. However, given the overall slowdown in automotive volumes impacting the topline, margins have come down to 17% in FY14 vs. 21.5% in FY11. Going ahead, we expect the consolidated EBITDA to grow at 25.6% CAGR during FY14-17E led by the strong revenue growth boosting the operating leverage through higher utilisation. Consequently, we expect EBITDA margins to recover to 20.3% in FY17E vs. 17% in FY14. We also highlight that in H1FY15, standalone margins have improved to 18.9% vs. 16.9% in FY14 showing the early signs of improving operating leverage.

Going ahead, we expect the consolidated EBITDA to grow Exhibit 17: EBITDA growth trend at 24.6% CAGR during FY14-17E 250 22 199.7 200 162.9 19 150 128.2 (%) 100.1 103.1 16

(| crore) 100

13 50

- 10 FY13 FY14 FY15E FY16E FY17E

EBITDA Margin (RHS)

Source: Company, ICICIdirect.com Research

Exhibit 18: Standalone EBITDA trend

250 22 201.8 200 166.1 19

150 128.0

16 (%) 93.7 100.6

(| crore) 100

13 50

- 10 FY13 FY14 FY15E FY16E FY17E

EBITDA Margin (RHS)

Source: Company, ICICIdirect.com Research

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Consolidated PAT growth of 39.3% CAGR in FY14-17E PAT grew at 11% CAGR during FY10-14. Here also, earnings posted handsome growth at 51.6% CAGR in FY10-12, de-growing 18.7% over Consolidated PAT is expected to grow at a CAGR of 39.3% FY12-14 owing to the overall automotive segment slowdown coupled in FY14-17E driven by healthy revenue growth and superior with a decline in margins. margins Going ahead, consolidated PAT is expected to grow at 39.3% CAGR in FY14-17E driven by healthy revenue growth and superior margins.

Exhibit 19: Standalone bottomline trend Exhibit 20: Consolidated earnings trend

120 10 100 89.1 12 96.8 100 80 66.2 73.9 9 80 8 60 47.2 45.5 (%)

50.2 (%) 6 60 47.0 33.0

38.2 (| crore) 40 (| crore) 40 6 3 20 20 - 4 - - FY13 FY14 FY15E FY16E FY17E FY13 FY14 FY15E FY16E FY17E

PAT Margin (RHS) PAT Margin (RHS)

Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research

FCF generation to improve going ahead… Handsome topline growth coupled with an improvement in margin is expected to boost the operating cash flow for NRB, going ahead. In terms of capex, the company expects only routine capex requirement of ~| 45- 50 crore every year over FY15-17E. Consequently, we expect NRB to generate an FCF of ~| 150 crore in FY15-17E. The consequent strong FCF is also expected to be a key driver for a reduction in debt-equity.

Exhibit 21: Strong FCF generation over FY15-17E

60.0 50.7 50.9 47.4

40.0 34.4 14.6 20.0

0.0 FY11 FY12 FY13 FY14 FY15E FY16E FY17E |crore -20.0 -11.0

-40.0

-60.0 -61.1 -80.0

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 11

Outlook and valuation NRB has been a key player in the domestic bearings industry considering its leadership position in needle roller bearings. Being an automotive centric supplier with customised product offerings, the company also enjoys a sticky client relationship like its MNC peers such as SKF, FAG & Timken and has a presence across all leading OEM players in India. NRB has consistently demonstrated a handsome financial performance with revenues and earnings CAGR of 15.6% and 65.9%, respectively, in FY09-14. Going ahead, with the overall improvement in the economy and other macro factors such as easing of inflation and lowering of interest rates, automotive volumes are expected to bounce back. NRB, being an important player in the automotive bearings space with a leadership position in needle roller bearings, is expected to be a key beneficiary. We also expect NRB’s export revenues to grow at 23.3% CAGR in FY14-17E as the company continues to expand its footprint in newer geographies. We believe NRB would be one of the key beneficiaries of automotive sector recovery, given its leadership position in the needle roller bearings space with a pure play in the mobility segment and strong consolidated earnings growth at 39.3% CAGR in FY14-17E. We maintain our BUY rating and ascribe a multiple of 18x (at ~30% discount to SKF) on the FY17E earnings to arrive at a valuation of | 165/share.

Exhibit 22: Price/earnings trend 150 135 120 105 90 75 60

Price (|) 45 30 15 0 Jul-11 Oct-12 Apr-10 Feb-11 Jan-09 Jan-14 Jun-09 Jun-14 Sep-10 Dec-11 Nov-09 Nov-14 Mar-08 Mar-13 Aug-08 Aug-13 May-12 Price 5x 10x 15x 20x 25x

Source: Bloomberg, ICICIdirect.com Research

Exhibit 23: Price/BV trend 150 120 90 60 Price (|) 30 0 Jul-14 Jul-13 Jul-12 Jul-11 Jul-10 Jul-09 Jul-08 Nov-14 Nov-13 Nov-12 Nov-11 Nov-10 Nov-09 Nov-08 Mar-14 Mar-13 Mar-12 Mar-11 Mar-10 Mar-09 Mar-08 Price 0.8x 1.6x 2.4x 3.2x 4x

Source: Bloomberg, ICICIdirect.com Research

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Company snapshot

180 Target Price 165

160

140

120

100

80

60

40

20

0 Jul-15 Jul-14 Jul-13 Jul-12 Jul-11 Jul-10 Oct-15 Oct-14 Oct-13 Oct-12 Oct-11 Oct-10 Apr-15 Apr-14 Apr-13 Apr-12 Apr-11 Apr-10 Jan-16 Jan-15 Jan-14 Jan-13 Jan-12 Jan-11 Jan-10

Source: Bloomberg, Company, ICICIdirect.com Research

Key events Date Event FY12 Industrial bearing undertaking demerged and listed as separate company called NRB Industrial Bearings FY10-13 Export led growth (67.8% CAGR) boosts the topline (18.7% CAGR) FY14 Muted automotive growth reflected in muted topline (growth of 2.5% YoY) FY15YTD Improvement in automotive sales boosts topline growth of NRB. Margins also expanded led by operating leverage

Source: Company, ICICIdirect.com Research

Top 10 Shareholders Shareholding Pattern Rank Name Latest Filing Date % O/S Position (m) Change (m) (in %) Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 1 Trilochan S Sahney Trust 30-Jun-14 46.7 24.6 0.0 Promoter 62.5 62.4 60.1 58.9 58.6 2 SKF UK, Ltd. 30-Jun-14 6.5 3.4 0.0 FII 20.2 20.2 19.0 17.4 11.6 3 Ruane, Cunniff & Goldfarb, Inc. 30-Jun-14 5.7 3.0 0.0 DII 1.2 1.2 4.8 10.7 13.5 4 HDFC Asset Management Co., Ltd. 31-Aug-14 5.7 3.0 0.2 Others 16.2 16.2 16.1 13.0 16.3 5 Carnegie Fonder AB 30-Jun-14 3.3 1.8 0.0 6 SBI Funds Management Pvt. Ltd. 31-Aug-14 3.0 1.6 0.0 7 UTI Asset Management Co. Ltd. 31-Jul-14 2.4 1.3 0.0 8 Reliance Capital Asset Management Ltd. 31-Aug-14 1.8 1.0 -0.3 9 The New India Assurance Co. Ltd. 30-Jun-14 1.2 0.6 0.0 10 APG Asset Management 30-Jun-14 1.1 0.6 0.0 Source: Reuters, ICICIdirect.com Research

Recent Activity

Buys Sells Investor name Value Shares Investor name Value Shares SBI Funds Management Pvt. Ltd. 13.49m 6.50m Ruane, Cunniff & Goldfarb, Inc. -7.73m -3.73m Zaveri (Harshbeena S) 10.80m 5.00m Sahney (Brijween Kaur) -1.62m -2.47m DSP BlackRock Investment Managers Pvt. Ltd. 4.34m 2.09m Sahney (Jasmin Pillai) -0.99m -1.50m Morgan Stanley Investment Management (India) Pvt. Ltd. 1.29m 0.62m Sahney (Anjana Kaur Thakkar) -0.98m -1.49m Zaveri (Harshbeena Sahney) 0.19m 0.09m Sahney (Ambita Kaur) -0.98m -1.49m

Source: Reuters, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 13

Financial summary

Profit and loss statement | Crore Cash flow statement | Crore

(| Crore) FY14 FY15E FY16E FY17E (| Crore) FY14 FY15E FY16E FY17E Total Operating Income 607.5 700.4 835.1 982.7 Profit after Tax 33.0 45.5 66.2 89.1 Other Income 2.9 3.4 3.8 4.1 Depreciation 35.6 38.2 41.5 44.8 Total Revenue 610.3 703.8 838.9 986.9 Interest 18.6 23.5 23.5 22.1 Other income (2.9) (3.4) (3.8) (4.1) Cost of materials consumed 228.0 262.9 313.5 368.9 Prov for Taxation 18.1 23.4 34.0 45.9 Purchase of stock-in-trade - - - - CF before WC changes 102.4 127.2 161.5 197.7 Change in inventories 5.9 6.8 8.1 9.6 Net Increase in CA (43.6) (33.7) (55.2) (86.3) Employee Expenses 101.0 116.1 133.5 154.9 Net Increase in CL 11.8 16.2 23.5 25.8 Other Expenses 169.4 186.3 217.1 249.6 Taxes Paid (15.9) (23.4) (34.0) (45.9) Total Operating Expenditure 504.3 572.2 672.3 783.0 Net CF from Operating activities 54.7 86.3 95.7 91.3 (Purchase)/Sale of Fixed Assets (69.2) (40.0) (50.0) (50.0) EBITDA 103.1 128.2 162.9 199.7 (Purchase)/Sale of Investments - - - - Interest 18.6 23.5 23.5 22.1 Other Income 2.9 3.4 3.8 4.1 PBDT 87.4 108.1 143.1 181.7 Net CF from Investing activities (66.4) (36.6) (46.2) (45.9) Depreciation 35.6 38.2 41.5 44.8 Inc / (Dec) in Equity Cap - - - - PBT 51.8 69.9 101.6 136.9 Inc / (Dec) in Sec Loan (0.9) 20.0 - (20.0) Total Tax 18.1 23.4 34.0 45.9 Inc / (Dec) in Unsec Loan 44.8 - - - PAT before MI 33.7 46.5 67.6 91.1 Interest (18.6) (23.5) (23.5) (22.1) Minority Interest 0.7 1.0 1.4 2.0 Minority Interest 0.7 1.0 1.4 2.0

PAT 33.0 45.5 66.2 89.1 Others (11.9) (13.5) (18.0) (22.5) Net CF from Financing Activities 14.1 (16.0) (40.1) (62.7) EPS 3 .4 4 .7 6 .8 9 .2

Source: Company, ICICIdirect.com Research Net Cash flow 2.5 33.7 9.4 (17.2) Opening Cash/Cash Equivalent 3.3 5.8 39.4 48.8 Closing Cash/ Cash Equivalent 5.8 39.4 48.8 31.6

Source: Company, ICICIdirect.com Research

Balance sheet | Crore Key ratios (| Crore) FY14 FY15E FY16E FY17E (Year-end March) FY14 FY15E FY16E FY17E Equity Capital 19.4 19.4 19.4 19.4 Per Share Data (|) Reserve and Surplus 199.7 231.6 279.8 346.4 EPS 3.4 4.7 6.8 9.2 Total Shareholders funds 219.0 251.0 299.2 365.8 Cash EPS 7.1 8.6 11.1 13.8 BV 22.6 25.9 30.9 37.7

Minority Interest 2.4 3.4 4.8 6.8 Operating profit per share 10.6 13.2 16.8 20.6

Total Debt 316.2 336.2 336.2 316.2 Operating Ratios (%) EBITDA Margin 17.0 18.3 19.5 20.3 Deferred Tax Liability 12.3 12.3 12.3 12.3 PAT Margin 5.4 6.5 7.9 9.1 Total Liabilities 550.0 603.0 652.6 701.2 Gross Block 543.0 583.0 633.0 683.0 Return Ratios (%) Acc: Depreciation 310.2 348.4 389.9 434.6 RoE 15.1 18.1 22.1 24.4 Net Block 232.8 234.6 243.1 248.3 RoCE 12.6 15.2 19.0 22.5 Capital WIP 38.3 38.3 38.3 38.3 RoIC 12.4 16.0 20.1 23.2 Total Fixed Assets 271.1 272.9 281.5 286.7 Goodwill on Consolidation 0.5 0.5 0.5 0.5 Valuation Ratios (x) EV / EBITDA 16.5 13.2 10.3 8.4 Investments 0.1 0.1 0.1 0.1 P/E 42.3 30.7 21.1 15.7 EV / Net Sales 2.8 2.4 2.0 1.7 Inventory 145.0 163.1 183.0 215.4 Market Cap / Sales 2.3 2.0 1.7 1.4 Debtors 184.2 189.1 208.8 245.7 Price to Book Value 6.4 5.6 4.7 3.8 Loans and Advances 70 .3 81 .1 96 .7 113 .8 - - - -

Other Current Assets 0.0 0.0 0.0 0.0 Turnover Ratios (x) Cash 5.8 39.4 48.8 31.6 Asset turnover 1.2 1.2 1.3 1.5 Total Current Assets 405.3 472.7 537.3 606.4 Debtors Turnover Ratio 3.3 3.7 4.0 4.0 Current Liabilities 106.1 122.4 145.9 171.7 Creditors Turnover Ratio 5.7 5.7 5.7 5.7 Provisions 20.8 20.8 20.8 20.8 Net Current Assets 278.4 329.5 370.6 413.9 Solvency Ratios (x) Net Debt / Equity 1.4 1.2 1.0 0.8 Total Assets 550.0 603.0 652.6 701.2 Current Ratio 3.2 3.3 3.2 3.2

Quick Ratio 2.1 2.2 2.1 2.0 Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 14

RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai – 400 093 [email protected]

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