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. ICICI Securities Ltd | Retail Equity Research 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 ICICI Securities Ltd | Retail Equity Research Page 2 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, Bajaj Auto, 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 ICICI Securities Ltd | Retail Equity Research Page 3 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.