india infoline report

It’s all about money, honey!

Indian Bearing Industry

AnalystAjay Shethiya +(91 22) 2685 [email protected]

Dealing(+91 22)2685 0505Sandeepa Vij 98201 92387Biren Patel 98204 43920

October 18, 2003

This Ball is on a Roll...

Indian Ball Bearing Industry : This Ball is on a Roll...

October 18, 2003 2

SECTOR RESEARCH Investment PerspectiveBearing Industry is likely to witness good times ahead riding on auto sectorboom, economic revival and export growth. Valuations of bearing companieshave not seen the kind of run up seen by Auto Ancillary peer group due to concernsover industry demand-supply dynamics and huge presence of unorganized sector.However we expect the leading players in the bearing industry to report a betterperformance over the next two years, as demand growth in key user industries isexpected to rise sharply.

The automobile industry is the largest user segment for Indian bearing market accountingfor almost 45% of total demand. The sector grew 16.5% yoy in FY03 and registereda similiar growth of 16.5% yoy in September 2003 . We expect all segment of automobileindustry to report strong growth in the coming year. Infrastructure has received a fillipin last 2 years through N-S-E-W corridor and Golden Quadrilateral projects. Thetransformation of road transport through these initiatives as well as higher economicgrowth would lead to higher demand for commercial vehicle industry. Passenger Carscontinue to grow in double digit driven by rising aspirations and cheap and easyavailability of finance. Within two wheelers, we expect motorcycle industry growth tocontinue on its growth path. After two bad years, the tractor industry is also likely towitness a turnaround with completion of inventory correction phase and good monsoonsis likely to drive demand.

The engineering sector is the second largest user segment for Indian bearing marketaccounting for 28% of bearing sales. The manufacturing sector has grown at 6% inFY03 and capital goods have shown a robust growth of 10.5% in FY03. The Indianeconomy is expected to grow by 6.5-7% in FY03-04. The overall revival in industryand manufacturing will drive capital investments and spur growth in the engineeringindustry – the second largest customer for bearings industry.

Exports of bearing companies has increased at a CAGR of 13% during the last 5years. The domestic players are sensing the outsourcing opportunity and have initiatedthe process of producing a range of bearings for meeting the requirement of the parentor other global customers.

Indian Bearing Industry

October 17, 2003

RecommendationsBuy

FAG BearingsCMP Rs: 98

ABC BearingsCMP Rs: 15

SKF BearingsCMP Rs: 84

NRB BearingsCMP Rs: 114


October 18, 2003 3

SECTOR RESEARCH

Organized SectorThe organized sector comprises of 12 leading manufacturers who contribute to over55% of the total turnover. The total investment in the organized sector is about Rs17bnwith an annual installed capacity of 234mn bearings and employs more than 14000people. Most of the big players are having either technical or financial collaborationwith leading auto manufacturers. International collaboration gives access to besttechnology in the world. Exhibit 2 represents the strong domestic presence andinternational collaboration of few big domestic players.

Exhibit1: Industry Structure

The Indian bearing industry is estimated at Rs30bn. The Industry has established ahighly diversified product range of around 1000 types of bearings, having high volumedemand. The domestic industry caters to almost 70% of total demand for commonvarieties and sizes of bearings. The remaining demand to the tune of 30% is beingimported, essentially for industrial applications and special purpose.

Bearing Industry in India can be divided into three segments – the organized sector,unorganized sector and imports. The organized sector primarily caters to the OEMsegment, which are predominantly automotive, railways and other industrial users.The replacement, market is dominated by unorganized sector. Exhibit 1 shows theindustry structure of bearing industry.

Industry Structure

Industry Structure

55%15%

30%

Domestic Organized Domestic Unorganized Imports

Exhibit2: Global collaborationSl.No Company Collaboration Domestic Presence1 FAG Bearing India FAG,Germany Spherical Roller Bearing2 SKF India SKF,Sweden Ball Bearing3 NRB Nadella,France Needle Roller Bearing4 ABC Bearings Ltd NSK, Japan Taper Roller Bearing5 Timken India Timken, USA Ball & Roller Bearing6 Bimetal Bearings Ltd. Clevite Corp,USA Engine Bearing

Repco,Australia7 Gabriel India Suspension,Italy Bimetal BearingSource: CompanyAnnual Report /India Infoline Research


October 18, 2003 4

SECTOR RESEARCH Huge Unorganized SectorThe unorganized sector includes the small-scale manufacturers and manufacturers ofspurious bearings. The unorganized sector contributes to almost 15% of total industryturnover. The unorganized sector players have a strong regional presence and mainlycater to the needs of the replacement market.

Imports30% of total demand for bearing industry is met by imports. While a part of the importscome through official channels, there is also a huge volume of illegal imports. LegalImports generally represent the specialized bearings not manufactured in India. Thereare a large variants of imported bearings, each holding a small market share in India.Though, the quality of bearings manufactured by large players in India is comparableto world standards, domestic manufacture is not viable due to the small size of themarket segment. It becomes uneconomical to manufacture such type of bearings as itincludes huge capital expenditure.Illegal imports generally represent the entry of spurious imports of bearings. In thepast, the Indian bearings industry was highly protected on account of very high importduties ranging from 150% to 240% ad valorem. As a result , illegal imports via smugglingand under invoicing of imports was the order of the day, accounting for a high 45-50%of total imports. While duty rates have come down over the last few years, a fewcountries like China, Russia, Eastern Europe dump their excess production at a verylow rate. This leads to a huge price differential between domestic and imported bearings(almost 40-50%), encouraging imports. Exhibit3 shows the current duty structure onbearigns.

Category Rate of DutyBall bearings 30%Tapered roller bearings, 30%including cone andtapered roller assembliesSpherical roller bearings 30%Needle roller bearings 30%Other cylindrical rollerbearings 30%Other, including combinedball/roller bearings 30%Balls, needles and rollers 30%Other 30%

Exhibit3: Present Duty Structure

Source: nic.in.budget


October 18, 2003 5

SECTOR RESEARCH Original Equipment Manufacturers (OEM) MarketThe OEM market for bearing represent the demand arising out of the original vehicleand industrial manufacturers. The demand for the OEM market directly depends uponthe growth in user industry. OEM market accounts for 40% of total demand of bearingindustry. This market is characterized by requirements of high quality, stringent deliverynorms and lower margins.

OEM’s have been facing price competition in their own markets, continue to exertprice pressure on the local bearing suppliers. The bearing capacity available in thecountry is in excess of demand, resulting in price reduction. The OEM bearing marketis likely to witness better days ahead on account of up swing in automobile industryand manufacturing sector.

Replacement MarketThe replacement market represents the demand arising on account of replacing theused and worn-out bearings. The size of replacement market is dependent on equipmentpopulation and frequency of maintenance. Replacement market accounts for 40% oftotal demand for bearing industry. The margins in this market are relatively higherplaced as compared to OEM market.The replacement market is highly price sensitive and has higher share of unorganizedplayers and cheaper imported bearings. Exhibit4 represent the bearing demand persector.

Market Dynamics

Exhibit 4: Bearing Demand Per Sector.

Market Dynamics

Replacement Market40%

OEM Market60%

In the last two years, Indian automobile and industrial sectors were facing a slowdown.This has led to lower growth in OEM segment and higher growth in replacementdemand. The organized players have been concentrating on improving share in thereplacement market.

Source: Industry


October 18, 2003 6

SECTOR RESEARCH Key Industry PlayersThe bearing industry in India is dominated by 12 organized players accounting around55% of industry sales. SKF Bearing is the major player in the Indian bearing industrywith a market share of 12%. However, as seen from the table, the share of majorplayers has been declining, indicating entry of small payers and imports into the industry.Exhibit5 represents the trend in market share of leading bearing manufacturers.

Exhibit 5: Changing Industry TrendsTrends in Market Share 95-96 96-97 97-98 98-99 99-00 00-01 01-02

% to total market sizeSKF Bearings India 15.99 15.39 15.53 13.84 12.90 12.32 12.39National Engineering Inds 13.31 14.80 12.78 13.13 10.92 10.29 8.98FAG Bearings India 5.43 5.27 6.53 6.56 6.34 6.94 8.98Timken India 4.19 5.72 5.05 5.02 5.47 4.73 4.23NRB Bearings 3.82 4.22 4.29 4.25 4.47 4.40 7.52TISCO 4.71 4.03 3.14 3.51 3.69 3.74 4.01ABC Bearings Ltd. 4.77 4.72 3.47 3.01 3.88 3.65 4.23Mahindra Sintered Products 3.50 3.14 3.54 3.31 3.35 3.29 3.14Sujana Industries 0.06 0.38 0.06 0.06 0.92 3.13 5.30Kirloskar Oil Engines 3.03 2.92 3.04 2.81 2.85 2.52 2.41Bimetal Bearings 2.79 2.69 2.26 2.19 2.34 2.32 4.01HMT Bearings 2.19 2.06 2.10 1.99 2.03 1.90 1.62Harsha Engineers 0.00 0.00 1.31 1.50 1.89 1.86 2.80Gabriel India 1.41 1.39 1.53 1.10 1.14 1.18 1.19ARB Bearings 0.00 0.00 0.00 0.58 0.69 0.96 3.14Austin Engineering Co. 1.63 1.69 1.88 1.42 1.10 0.93 3.20Mipco Seamless Rings (Gujarat) 0.97 1.17 0.88 0.62 0.88 0.77 2.41Asian Bearing 1.85 1.86 1.62 1.81 1.24 0.73 1.98SBL Industries 1.62 1.22 1.36 1.02 0.81 0.63 1.62Texspin Bearings 0.00 0.00 0.00 0.53 0.56 0.55 1.90Total for above companies 71.29 72.68 70.36 68.26 67.48 66.84 65.08Imports 24.82 23.59 25.12 25.96 26.57 28.19 32.92Others 3.89 3.73 4.52 5.78 5.95 4.97 2.00Total 100.00 100.00 100.00 100.00 100.00 100.00 100.00Total Domestic Production 75.18 76.41 74.88 74.04 73.43 71.81 67.08Source: CMIE/ India Infoline Research


October 18, 2003 7

SECTOR RESEARCH Sales Revenue of Key PlayersCompany 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03SKF Bearings Ind 3449 3781.5 3416.6 3300.5 3491 3396 3334 3824National Engg Inds 2871 3637 2812 3130 2953 2836.3 2418 2349Timken India 904 1406 1110.5 1197 1480 1304 1139 1509FAGBearings India 1172 1296 1436 1564 1714 1912 2023 2146Timken India 904 1406 1110 1197 1480 1304 1139 1139NRB Bearings 824 1036 943 1013 1209 1212 1427 1678TISCO 1016 990 690 836 999 1031 1080 1102ABC Bearings Ltd. 1028 1160 763 717 1050.4 1007 752 819Kirloskar Oil Engines 653 717 669 670 770.8 694 647 692Bimetal Bearings 602 661 498 521 633.9 640 533 573Gabriel India 303 341 336 261 307 324 319 325Austin Engg. Co. 350 415 414 338 297 255 241 235Mipco Seamless Rings209.3 288 193 149 238 211 220 46Total of aboveCo. 14291 17139 14394 14898 16627 16130 15278 16442Other 1922 1639.3 2084 2753 3240 3663 2779 3417Total Sales 16214 18779 16478 17651 19867 19794 18057 19860ETotal Imports 5354 5799 5528 6190 7189 7772 8863 10100EExports 588 692 1285 1692 2198 2616 2540 2870ETotal Market Size 21568 24578 22006 23841 27056 27566 26920 29960ESource: India Infoline Research


October 18, 2003 8

SECTOR RESEARCH The demand for bearing industry is derived from demand in two key user segments -automobile and industrial sector growth. The automobile industry is the largest growthdriver for OEM market as it accounts for almost 45% of total bearing market.Engineering sector, which accounts for 28% of total share, holds the second growthdriver. Considering the high reliance of bearing industry on automobile sector, the fateof bearing industry is largely dependent on production of vehicles. The demand ofbearing is also linked to heavy-duty industrial application in rolling stock, rolling mills,heavy earth moving equipments and other heavy machinery, accounting for 21% oftotal bearing market. However demand in the latter category is met through importsand therefore does not have significant impact on domestic growth .Exhibit 6 showsthe contribution of various user segments to the total bearing industry demand.

Growth Drivers

Exhibit6: User-Segments to Bearing Industry

User-Segments

General Engineering

28%

Heavy Industries including railways

21%

Electrical equipment &

other6%

Automobile45%

Up Swing in Automobile SectorThe Indian Automobile sector has grown 16.5% in FY03 contributed by export growthof 65.3% and domestic growth of 14.8%. The automobile industry comprising ofcommercial vehicles, passenger cars, multi-utility vehicles, two/three wheelers andtractors has performed extremely well in FY03. The sharp growth of this sector hasbeen partly driven by the impact of lower interest rate on demand, intermediated by acompetitive financial sector, which has steadily cut prices of automobile loans as interestrates went down.

Infrastructure has received a fillip in last 2 years through N-S-E-W corridor and GoldenQuadrilateral projects. The transformation of road transport industry through theseinitiatives will lead to higher demand for commercial vehicle industry. Passenger carscontinue to grow in double digit driven by rising aspiration levels and easy availabilityof cheap finance. Within two wheelers, we expect motorcycle industry growth to continueon its growth path. After two bad years, the tractor industry is also likely to witness arevival with completion of inventory correction phase and good monsoons likely todrive demand. The positive outlook for auto sector augur well for bearings demandand we expect all segment of automobile industry to report strong growth in the comingyear.

Source: BRBMA/India Infoline Research


October 18, 2003 9

SECTOR RESEARCH

Exhibit7: Export Trends

Export PotentialExports of bearings companies has increased at a CAGR of 13% in last seven yearsfrom 1995-96 to 2001-02 at Rs2.5bn.Big players in Indian ball and roller bearinghave been already exporting a part of their production to developed countries like US,Europe etc. Domestic players are already sensing the outsourcing opportunity andhave initiated the process of manufacturing a range of bearings for meeting therequirements of global customers. The Indian bearing industry, especially the companieshaving technical/ financial collaboration with global players like SKF Bearings, FAGBearings, Timken India, ABC Bearings and NRB Bearings are expected to garnerhigher pie in export market. Exhibit7 shows the export trend of bearing companiesover the years.

Export Trend

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Export revenues contributes more than 20% to net sales of FAG Bearings. It has setup a 100% EOU in Vadodara to cater to the growing export market. NRB Bearing isalso planning to achieve exports share of 10% in coming year, which presently accountsfor 6% of its net sales.

Source : CMIE/India Infoline Reasearch


October 18, 2003 10

SECTOR RESEARCH Spurious ProductsSpurious products form a significant part of the Indian bearing market. According tothe study of National Council of Applied Economic Research (NCAER) on autocomponents, it stated that out of Rs64bn worth auto component market, spuriouscomponents accounted for about 40%, original equipment components for about 33%and unbranded products for the rest 25%. Spurious products mainly cater to thereplacement market, which is price sensitive. Spurious bearings are of poor qualityand are relatively unsafe and unreliable. They use material, which are of inferior qualityand the workmanship is also poor. The presence of unorganized sector in the bearingindustry poses a real threat to the organized players.

Import ThreatThe custom duty on imported bearings has reduced from 35% to 30% in FY03 and isexpected to come down further in line with WTO agreements. Reduction in importduty is likely to attract more imports in the future. The imported bearings are targetedmainly at the replacement market . Imports are widespread in the case of ball bearings.Coupled with inflow of spurious products the organized sector is also facing threatfrom smuggling of goods. Major imports of ball bearing are from China and have beenrising. Apart from China, imports are also routed from countries such as Russia andRomania. Exhibit 8 represents imports of Ball Bearing in India and each Country’sshare in total imports to India.Exhibit 8: Imports of Ball BearingCountry (Amt in Mn) % Share yoy

2001-02 2002-03 %Japan 689.8 676.0 24.0 21.7 (2.0)German FR 459.2 525.3 16.0 16.9 14.4China PR 465.4 438.6 16.2 14.1 (5.8)Singapore 175.3 183.5 6.1 5.9 4.7Russia 178.6 158.9 6.2 5.1 (11.0)Romania 94.9 141.4 3.3 4.5 49.0Sweden 114.7 133.5 4.0 4.3 16.3USA 98.0 122.0 3.4 3.9 24.4France 91.3 103.0 3.2 3.3 12.8Korea RP 71.9 99.8 2.5 3.2 38.9UK 72.0 68.8 2.5 2.2 (4.4)Sloval RP 44.7 65.4 1.6 2.1 46.5Italy 69.3 59.2 2.4 1.9 (14.6)Belarus 29.9 57.4 1.0 1.8 91.6Czech Republic 27.0 53.6 0.9 1.7 98.7Total of above co’s 26065.9 28272.5 93.3 92.6Other 2681.9 2886.2 6.7 7.4Total 28747.8 31158.7 100 100Source: www.ieport.com/India Infoline Reasearch

Threats


October 18, 2003 11

SECTOR RESEARCH Increase in Raw Material PricesSteel and alloy steel forms the basic material for the manufacturing of bearings, accountfor almost 45% of total net sales. Steel prices therefore has significant impact on margins.Steel prices have appreciated 40% since January 2002. The significant increase insteel prices have resulted in pricing and margin pressure on bearing manufacturers. Weexpect the steel prices to show an upward trend or atleast remain firm in the comingfuture. A look at the price trends in last nine successive quarters shows an increasingtrend in HR and CR coil prices. Exhibit9 shows the HR & CR coil price in successivenine quarters.

Exhibit 9: Price Trend


October 18, 2003 12

SECTOR RESEARCH Incorporated in 1962,as precision Bearings India Ltd., rechristened as FAG BearingIndia Ltd., in the year 1999.It is a subsidiary of INA Schaeffler KG, Germany, andFAG, Germany.FAG Bearing is a leading OEM supplier to the automotive industry,mechanical and electrical engineering industry, apart from the railways.It has an annual installed capacity of 22mn.The manufacturing plant of the company islocated at Maneja in Vadodara.In the spherical roller bearing segment FAG Bearings commands market leadershipwith around 52% of market share and notable market share of 31% and 17% in thecylindrical roller bearing and ball bearing, segment respectively.

FAG Bearings

Share Holding Pattern %Promoters 51.00Institutional Investors 13.73Other Investors 11.17General Public 24.10

Share Price Chart

RecommendationBUY

CMP Rs 9852 week H/L Rs 101/44Market Cap Rs 1.6bn

Investment RationaleExport DriveFAG Bearing India Ltd. set up the country’s first 100% export-oriented unit for bearings.The company is also planning to set up two more plants in Vadodara. At present, it hasa manufacturing unit and a 100% EOU in Vadodara.Bearings manufactured from EOU plant have already received staggering recognitionfrom European and US customers such as Daimler Chrysler, Volvo, Volkswagon,Renault, Voith, Otis and General Dynamics.Exports of Rs444.1mn in 2002 contributedto more than 20% to net sales. Contribution from EOU and company’s initiative toupgrade non-EOU plant in order to meet export needs will further supplement thecompany to achieve higher exports.

Entry in Taper Roller SegmentFAG Bearings in joint venture with FAG Roller Bearing Pvt. Ltd., launched their firstindigenously produced tapered roller bearings unit in Indian market at Chakan, Pune.Theplant has the annual installed capacity of 2mn tapered roller bearings sets.This will help the company to tap highly competitive taper roller bearing segment ofRs4000mn.In this move the company has already created dealer network and upgradedtheir facilities. This will mitigate the product risk and generate additional revenues.With entry into taper rolling bearings, it will cater to the complete range of bearings.

Segment-Wise Share

Ball Bearing17%

Cylindrical Roller

Bearing31%

Spherical Roller

Bearing52%

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October 18, 2003 13

SECTOR RESEARCH

Financials Highlights

Expanding Product portfolioIt has established a milestone in product development by developing 84 types of bearingsin the year and plans to add more to the portfolio. FAG Bearing has signed a newtechnical know-how agreement with FAG Hanwha Bearing Corporation, Korea forfew special bearings and with its parent for Arcanol greases.ValuationAt the current price of Rs98, the stock is trading at P/E of 7.2x FY03E earnings ofRs13.5. We expect the company to show better results, on account of export potentialand product diversification. For FY02, the ROCE and ROE stood at 24.9% and17.6% respectively.

Financial ReviewFAG Bearings has maintained consistent growth in spite of intense competitive pressureon prices, margins and low volumes of orders from customers. The company was ableto achieve better profits on account of extensive cost reduction measures and focussedproduct mix planning.The net sales of the company grew 9.2% to 2472mn while, net profit grew 31.6% yoyto Rs197.7mn in 2002 as against Rs150.2mn in 2001. The EPS has registered agrowth of 32% increasing from Rs.9 in 2001 to Rs.11.9 in the 2002. FAG Bearingshas declared a dividend of 40% for 2002.FAG has maintained the same increase in topline for H1 F12/03, the sales has increasedto Rs1235 in H1 F12/03 from Rs1133mn in H1 F12/02.Interest burden has significantlydipped 50.4% to Rs19.5mn in H1 F12/03 from Rs39.3mn in H1 F12/02.

Period to H103 H102 GrowthRs mn (6) (6) (%)Sales 1235 1133 9.2Other income 8.9 1.0 790.0Total income 1243.6 1133.7 9.7Expenditure (1005.6) (906.2) 11.0Operating profit 238.0 227.5 4.6Interest (19.5) (39.3) (50.4)Depreciation (82.5) (76.0) 8.6PBT 136.0 112.2 21.2Tax (35.5) (26.2) 35.5PAT 100.5 86.0 16.9Extraordinary items 0.0 0.0 0.0APAT 100.5 86.0 16.9OPM (%) 18.6 20.0 (7.2)Equity 166.2 166.2 0.0EPS (Rs) 12.1 10.3 16.9


October 18, 2003 14

SECTOR RESEARCHPeriod to 2001 2002 2003E 2004ERs mn (12) (12) (12) (12)Sales 2274 2472 2694 2964Other income 6.9 12.8 14.0 12.0Total income 2281.0 2484.8 2708.5 2975.9Expenditure (1848.0) (2001.5) (2196.0) (2400.8)Operating profit 433.0 483.3 512.5 575.1Interest (79.8) (59.6) (45.0) (46.0)Depreciation (161.0) (169.8) (170.0) (185.0)PBT 192.2 253.9 297.5 344.1Tax (42.0) (56.2) (72.9) (84.3)PAT 150.2 197.7 224.6 259.8Extraordinary items 0.0 0.0 0.0 0.0APAT 150.2 197.7 224.6 259.8OPM (%) 18.7 19.0 18.5 19.0Equity 166.2 166.2 166.2 166.2EPS (Rs) 9.0 11.9 13.5 15.6

Production Trends and Segmentwise Revenues

Capacity Units 1999 2000 2001 2002Bearings (Ball & Roller) 000 20371 20371 22000 22050

Production Units 1999 2000 2001 2002Bearings (Ball & Roller) 000 17449 20686 21733 24656Components 000 114 149 104 139

Sales Volumes Units 1999 2000 2001 2002Bearings & Components (Traded) ‘000 23 28 51 66Bearings (Ball & Roller) ‘000 17487 20315 22455 23823Components ‘000 119978 136343 133528 89077

Sales Value Units 1999 2000 2001 2002Bearings & Components (Traded) Rs.(Mn) 120 139 193 290Bearings (Ball & Roller) Rs.(Mn) 1714 1912 2024 2146Components Rs.(Mn) 5 6 10 7


October 18, 2003 15

SECTOR RESEARCH Incorporated in 1961, Anti Friction Bearing Corporation Ltd., renamed itself to ABCBearings in the 2002.In 1998,it entered strategic alliance with NSK, Japan.ABC Bearing manufacturers tapered roller bearing and cylindrical bearing. It has annualinstalled capacity of 8.3mn.The plants are located at Lonavala and Bharuch.

Investment RationaleStrong TurnaroundABC Bearings made a strong turnaround in FY03 reporting a profit of Rs14.6mn asagainst a loss of Rs47.5mn in FY02. Efficient working capital management, utilizationof cost-effective measures, reduction of excess work force, surrogating of expensiveloans has assisted the company to put itself in black and see a strong turnaround foritself. This initiative has enabled operating margins to increase from 10% in FY02 to16% in FY03.The company is currently under utilizing its capacity to the extent of60%. Any increase in further utilization of existing capacity will generate higher profitsas the company has already turned around.

NSK Alliance Paying OffNKS Ltd., Japan has been rendering valuable technical support and guidance to thecompany in the field of technical-upgradation and system improvements. Being theonly lucrative player in organized bearing sector, there is possibility of equity participationfrom NSK.This will further strengthen the alliance and help ABC Bearing to explorenew markets and clients. The current supply to Toyota Kirloskar was possible onlydue to NSK alliance.

Cost Cutting InitiativesDuring the current year, ABC Bearings has undertaken major initiatives in order toreduce the cost structure. During February - March 2003, it swapped expensive debtwith lower interest bearing debt. The steps towards reorganization of plant layout,reduction in labor cost and severe reduction in fixed cost will help the company to earnhigher operating margins in the coming years.

New Order from TKMABC Bearings has been identified as sole supplier of specialized bearings for applicationin their transmission by Toyota Kirloskar Motor Limited. In order to meet the freshrequirement, company is currently in the process of installing the machinery,while thefresh order is expected to commence from FY04 adding Rs100-200mn every year tocompanys topline. ABC already enjoys being the exclusive indigenous supplier ofTaper Roller bearing for TKM’s Qualis vehicles.

ABC Bearings


Share Price Chart

RecommendationBUY


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October 18, 2003 16

SECTOR RESEARCH Financial ReviewAnnual AnalysisFor the FY03 ABC Bearing has shown a remarkable recovery with net profits standingat Rs14.5mn as against the loss of Rs.47.5mn in FY02.The net sales of the companygrew 12% yoy to Rs725mn in FY03 as against Rs649mn in FY02. The setback in thetractor sector has affected the sales volume of the company. Exports of the companyhave marginally to Rs24.1mn from Rs8.3mn in FY02.The net profits of the company for Q1FY04 grew 186% to Rs9.3mn as against a lossof Rs10.1mn in Q1FY03.The annualized EPS for the same period has increased toRs3.2 from Rs -3.7.

ValuationAt the current price of Rs15, the stock is trading at P/E of 3.5x FY04E earnings ofRs4.2. We expect the company to show better results, on account of effectiveturnaround and better utilization of existing capacity. For the FY03, the ROCE andROE stood at 21% and 7.7% respectively.

Financial Highlights

Period to Q1FY04 Q1FY03 Growth(3) (3) %

Sales 183 157 16.8Other income 3.1 2.1 52.4Total income 186.4 158.9 17.3Expenditure (147.8) (144.5) 2.3Operating profit 38.6 14.4 168.7Interest (8.2) (16.9) (51.4)Depreciation (16.8) (12.6) 33.5PBT 13.6 (15.1) (189.7)Tax (4.2) 4.3 (197.7)PAT 9.3 (10.8) (186.5)Extraordinary items 0.0 0.0 0.00APAT 9.3 (10.8) (186.5)OPM (%) 19.3 7.8 -Equity 115.5 115.5 -EPS (Rs) 3.2 (3.7) -


October 18, 2003 17

SECTOR RESEARCH

Production Trends and Segmentwise Revenues

Capacity Units 2000 2001 2002 2003Bearings (Ball & Roller) ‘000 15300 8300 8300 8300

Production Units 2000 2001 2002 2003Bearings (Ball & Roller) ‘000 6623 4584 3010 3331Components ‘000 - - - 439

Sales Volume Units 2000 2001 2002 2003Bearings (Ball & Roller) ‘000 6444 5223 3315 3280Components ‘000 - - - 436

Sales Value Units 2000 2001 2002 2003Bearings (Ball & Roller) Rs.(Mn) 1050 1008 752 820Components Rs.(Mn) - - - 20

Period to FY02 FY03 FY04E FY05E(12) (12) (12) (12)

Sales 649 725 856 1018.6Other income 19.3 22.8 16.7 17.0Total income 668.6 748.2 872.7 1035.6Expenditure (582.3) (610.9) (693.3) (825.0)Operating profit 86.3 137.3 179.3 210.5Interest (73.7) (60.8) (43.0) (44.0)Depreciation (40.9) (54.7) (67.3) (70.0)PBT (28.2) 21.8 69.1 96.5Tax (19.3) (7.2) (20.7) (29.0)PAT (53.4) 14.6 48.3 67.6Extraordinary items 0.0 0.0 0.0 0.0APAT (53.4) 14.6 48.3 67.6OPM (%) 10.3 15.8 19.0 19.0Equity 115.5 115.5 115.5 115.5EPS (Rs) (4.6) 1.3 4.2 5.9


October 18, 2003 18

SECTOR RESEARCH SKF Bearing India, is a subsidiary of SKF, Sweden, the leading global supplier ofrolling bearing and seals, which holds 54% stake in the company.The company manufactures a product range comprising about 60 sizes of deep grooveball bearings, 70 sizes of taper roller bearings, textile machinery components, automotivespecials, bearing accessories like housings, sleeves, etc. The company currently catersto the needs of automotive, electrical and industrial OEMs and aftermarket customers.The company has annual installed capacity of the company is 71mn ball and rollerbearings.Approximately 60% of the total sales of bearings are from the Original EquipmentManufacturers (OEM) sector while the remaining 40% are after market/replacementsales. In addition to its comprehensive range of bearings it is also offering a wide rangeof bearing related products and systems, such as Condition Monitoring Systems forTrouble-free Operations, Linear Motion products, Machine Tool Spindle maintenanceetc.

Investment rationaleStrong PresenceSKF Bearings has strong presence in the Indian bearing industry, commanding highestshare of 12.3% in total 23mn industry. It serves to almost each and every segment ofthe industry. Automobile industry accounts for 35% of its total revenue. SKFs strongpresence coupled with growth in automobile industry is likely to improve companysgrowth.

Innovative Product LaunchCompany is planning to launch a series of new products in the Indian replacementmarket, which accounts for 40% of total market. The company has successfully launcheda new wheel-bearing kit for Maruti 800.In order to further increase it presence in thesame segment, it is planning to introduce similar kits for Sumo Model.Simultaneously,it plans to offer imported wheel bearing kits, clutch release bearing kits, timing belt kitsand other products from its groups overseas plant in Indian market. This move willprove instrumental in increasing its revenue share in the market for automobile spareparts.

Debt Re-StructuringIn order to retire high cost debt instruments, SKF Bearing made right issue in theFY01.This move resulted in significant reduction of interest burden. The debt/equityratio for the company has decreased from 2.1:1 in 1999 to 0.5:1 in 2002, which islikely to reduce further. Secured redeemable non convertible debentures of Rs200mnwere due to retire in August 2003.Capital restructuring resulting in reduction of interestcost burden is likely to improve the company’s profitability.

SKF Bearings


Share Price Chart

RecommendationBUY


0200000400000600000800000

10000001200000

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October 18, 2003 19

SECTOR RESEARCH ValuationAt the current price of Rs87, the stock is trading at P/E of 15x FY03E earnings ofRs5.7. We expect the company to exhibit better results, on account of its strongpresence and implementation of growth strategies.

Financial AnalysisSKF Bearings has for the first time crossed the Rs4bn.The topline grew by 13.5% toRs4.1mn,as against RS3.5bn in 2001.The net profits of the company has shown aremarkable growth of 128%. Net profits for the 2002 stood at Rs204.2mn againstnet profit of Rs89.2mn in 2001.Working capital of the company have significantlyimproved and huge focus is given on receivable front. The company increased itsproduction capacity by 17% in 2002 (62mn Nos.) as compared to 2001 (53mnNos.). EPS for 2002 stood at Rs4.5 against EPS of Rs2 in 2001.

Sales for the H1 F12/03 stood at Rs2171mn as against Rs1995mn in H1 F12/02, anincrease of 9%. Net profit after tax for the same period was at Rs112mn againstRs59.7mn for the corresponding period of 2002,a significant increase of 88%.The robust increase in the net profit recorded for H1 F12/03, is the result of increasedvolumes in the automotive and industrial sectors, as well as savings from the debtrestructuring undertaken earlier. Net interest payments for H1 F12/03 stood at Rs17mn,down 48 % from Rs32.8mn in H1F12/02.



Period to H103 H102 GrowthRs mn (6) (6) (%)Sales 2171 1995 9Other income 139.8 61.0 129.2Total income 2311.1 2056.0 12.4Expenditure (1961.1) (1739.4) 12.7Operating profit 350.0 316.6 10.5Interest (33.4) (66.5) (49.8)Depreciation (131.8) (136.7) (3.6)PBT 184.8 113.4 63.0Tax (59.3) (53.7) 10.4PAT 125.5 59.7 110.2Extraordinary items (13.4) 0.0 (100.0)APAT 112.1 59.7 87.8OPM (%) 9.7 25.5 (62.0)Equity 452.6 452.6 0.0EPS (Rs) 5.0 2.6 87.8


October 18, 2003 20

SECTOR RESEARCH

Production Trends & Segmentwise RevenuesProduction Unit 2000 2001 2002Bearings (Ball & Roller) ‘000 56576 52987 62052Spares, Components &Accessories For Textile Machinery ‘000 1961 1559 1318

Sales Volumes Unit 2000 2001 2002Bearings (Ball & Roller) ‘000 54039 52634 62586Spares, Components &Accessories For Textile Machinery ‘000 1961 1539 1398

Sales Value Unit 2000 2001 2002Bearing Accessories &Maintenance Products (Traded) Rs.(Mn) 9 60 56Bearings (Ball & Roller) Rs.(Mn) 3396 3335 3824Spares, Components &Accessories For Textile Machinery Rs.(Mn) 213 178 177

December ending Company

Period to 2001 2002 2003E 2004ERs mn (12) (12) (12) (12)Sales 3573 4057 4463 4976Other income 148.0 141.3 180.0 160.0Total income 3721.0 4198.5 4642.9 5136.2Expenditure (3210.4) (3485.0) (3900.1) (4340.1)Operating profit 510.6 713.5 742.9 796.1Interest (203.2) (109.7) (71.0) (40.0)Depreciation (331.6) (274.0) (275.0) (280.0)PBT (24.2) 329.8 396.9 476.1Tax (12.9) (125.6) (127.0) (152.4)PAT (37.1) 204.2 269.9 323.8Extraordinary items 126.3 0.0 (14.0) 0.0APAT 89.2 204.2 255.9 323.8OPM (%) 10.1 14.1 12.6 12.8Equity 452.6 452.6 452.6 452.6EPS (Rs) 2.0 4.5 5.7 7.2


October 18, 2003 21

SECTOR RESEARCH Incorporated in 1966,as Needle Roller Bearing Company in joint venture with Nadella,France.It the first company in India to manufacture Needle Roller bearings. The companyrenamed itself to NRB Bearings Ltd., in view of diversified range and types of bearingsbeing manufactured.NRB manufactures over 600 different types of bearings at its plants located at Thane,Jalna, Waluj, Aurangabad and Hyderabad.In the needle roller bearing segment NRB Bearings commands market leadership witharound 70% of market share and notable market share of 16% in the cylindrical rollerbearings. The company has also taken up the manufacturing of ball and taper rollerbearings.

Investment RationaleDiversified Product RangeNRB has most diversified and specialized bearing and manufacturers almost all typesof bearing. It is into manufacturing of needle roller bearings, spherical roller bearings,cylindrical roller bearings, tapered roller bearings, ball bearings, crank pins and wideinner ring bearings. The wide product range has confirmed it strong position in virtuallyeach segment of the industry. This has resulted in NRB Bearings to achieve leadershipin the Indian needle roller bearing markets with the market share of 70%. With acontinual drive on tailoring bearings to meet specific needs, NRB has successfullydeveloped customization and applications expertise as their strength. In tapered rollerbearings and in ball bearings, NRB is focussing on manufacturing of ‘specials’ forselected customers like Maruti, Sona Steering, Mahindra & Mahindra, Telco.It is alsomanufacturing ball bearings for two and three wheeler segments.

Export PotentialThe company is eyeing on the export market. NRB expects the Share of exports tocontribute 10% of total sales by 2004,which presently accounts for only 6% of totalsales. NRB has already entered talks with some of the major OEMs. In this move, ithas already started getting its facilities QS 9000 certified being prerequisite to supplyto many markets. NRB is also exploring the possibility of tapping replacement market

NRB Bearings


Share Price Chart

RecommendationBUY


Segment-Wise Share

Cylindrical Roller

Bearing16%

Needle Roller

Bearing70%

Ball & Roller Bearing

14%

0

50000

100000150000

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020406080100120


October 18, 2003 22

SECTOR RESEARCH in Asian and European countries. It plans to develop new products to cater to therequirements of international market. Technical collaboration with Nadella, Francewill prove significant in achieving the export targets. At present Renault Vehicle Industries- France is sourcing components for its truck division from NRB.

Eyeing penetration in replacement marketThe company is all set to garner higher share in replacement market. In order toincrease its penetration in replacement market it is focusing on market development.The company is also increasing to expand its dealer network in the lucrative regions ofsemi-urban and rural market In order to increase the overall reach it is planning to setup country wide plan. These initiates will aid the company to increase its penetration inlucrative areas and margins being higher in case of replacement market will translate inhigher margins.

ValuationAt the current price of Rs114, the stock is trading at P/E 8x FY04 of Rs14.2. Weexpect the company to show better results, on account its strong dominance in marketand diversified product portfolio.

Financial AnalysisThe net profits of the company grew 42% yoy to Rs130.1mn in FY03 as againstRs91.7mn in FY02 .The net sales of the company increased from Rs1284mn toRs1454mn for the same period. Interest expenses have significantly decreased by36%. The EPS increased from Rs9.5 in FY02 to Rs13.4 in FY03.

The net profits of the company for Q1FY04 have increased from Rs22.5mn ascompared to net profit of Rs49.1mn in Q1FY03.The bottom line of has increased by19% from Rs381mn in FY02 to Rs321mn in FY03.The interest burden has dippedby 56.4% from Rs5.5mn in Q1FY04 to Rs2.4mn in Q1FY03.The EPS for the sameperiod has significantly increased from Rs7.6 to Rs12.1.


October 18, 2003 23

SECTOR RESEARCH

Period to Q1FY04 Q1FY03 GrowthRs mn (3) (3) %Sales 381 321 19Other income 5.7 5.5 3.6Total income 386.7 326.5 18.4Expenditure (301.4) (265.0) 13.7Operating profit 85.3 61.5 38.7Interest (2.4) (5.5) (56.4)Depreciation (25.4) (23.5) 8.1PBT 57.5 32.5 76.9Tax (8.4) (10.0) (16.0)PAT 49.1 22.5 118.2Extraordinary items (19.8) 0.0 (100.0)APAT 29.3 22.5 30.2OPM (%) 20.9 17.4Equity 96.9 96.9 -EPS (Rs) 12.1 9.3 -


December ending Company

Period to FY02 FY03 FY04E FY05ERs mn (12) (12)Sales 1284 1454 1730 2076Other income 34.7 27.6 22.0 22.0Total income 1318.7 1481.7 1752.4 2098.5Expenditure (1051.4) (1151.7) (1418.9) (1702.7)Operating profit 267.3 330.0 333.5 395.8Interest (27.8) (17.8) (9.6) (9.0)Depreciation (94.9) (103.7) (105.0) (108.0)PBT 144.6 208.5 218.9 278.8Tax (52.9) (78.4) (81.0) (103.1)PAT 91.7 130.1 137.9 175.6Extraordinary items 0.0 0.0 0.0 0.0APAT 91.7 130.1 137.9 175.6OPM (%) 18.1 20.8 18.0 18.0Equity 96.9 96.9 96.9 96.9EPS (Rs) 9.5 13.4 14.2 18.1


October 18, 2003 24

SECTOR RESEARCH Production Trends & Segmentwise Revenues

Capacity Unit 2000 2001 2002 2003Bearings (Ball & Roller) ‘000 8025 10000 10500 10500Components (Automobile) ‘000 1500 1500 2500 2500Electrical Steel StampingAnd Laminates MT 500 500 500 500Loose Needle Rollers ‘000 2029120 2029120 2029120 2029120Needle Roller Brushes & Cages ‘000 32794 32794 35294 35294

Production Unit 2000 2001 2002 2003Bearings (Ball & Roller) ‘000 6377 7110 7289 8230Components (Automobile) ‘000 1233 640 1314 1674Loose Needle Rollers ‘000 1223077 1174353 1041570 1198754Needle Roller Brushes & Cages ‘000 23554 21977 23644 21299

Sales Volumes Unit 2000 2001 2002 2003Bearings (Ball & Roller) ‘000 6531 6540 7310 7835Components (Automobile) ‘000 1126 664 1367 1661Loose Needle Rollers ‘000 589481 486525 525232 593815Needle Roller Brushes & Cages ‘000 22777 20948 22594 20344

Sales Value Unit 2000 2001 2002 2003Bearings (Ball & Roller) Rs.(Mn) 689 717 785 878Components (Automobile) Rs.(Mn) 39 24 54 83Loose Needle Rollers Rs.(Mn) 109 91 100 110Needle Roller Brushes & Cages Rs.(Mn) 520 496 536 605Others Rs.(Mn) - 25 1 1


October 18, 2003 25

SECTOR RESEARCH Annexure1Basics of Bearing

Bearing are used in the rotating parts of virtually every machine, the precision in dimensionsform a key factor to the performance of the machines as whole. Rotation movement is anindispensable characteristic in utilizing mechanical power. It is critical component of anyequipment that rotates. The automobile industry is the major user segment for bearings,followed by general engineering, heavy industries and railways.Bearings can be broadly classified into two segments:

1.Bimetals2.Anti-friction Bearings.Bimetal bearings (also known as engine bearings) are primarily used in the engines ofautomobiles or machines. The bearings are meant to reduce the friction between the mov-ing part of an engine crankshaft or camshaft and its associated support surface.

Anti friction bearings includes ball bearing and roller bearing. Roller bearings can be furthersub divided into Tapered Roller, Cylindrical Roller, Needle Roller, Thrust bearings and otherspecial application bearings. The main component of an anti-friction bearing are the innerring, the outer ring, the rolling elements, the cage and the seals.

Distrubution of Production

54%30%

7% 6% 3%

Ball Bearing Taper Roller Cylindrical RollerNeedle Roller Spherical Roller

1.Tapered Roller BearingTapered roller bearings consist of four interdependent components: the cone, or inner ring;the cup, or outer ring; the tapered rollers, or rolling elements; and the cage, or roller retainer.The taper angles allow the bearing to handle a combination of radial and thrust loads. Thesteeper the cup angle, the greater the ability of the bearing to handle thrust loads. Taper rollerbearings accounts for of 30% to total production of bearings.


October 18, 2003 26

SECTOR RESEARCH 2.Needle Roller BearingNeedle roller bearings comprise of special form of cylindrical roller bearings in which therollers are of a very small diameter and comparatively long therefore, they have the advantageof a very small difference bet. These bearings are detachable and suitable for carrying onlyradial loads. It accounts for 7% of total production of bearings.

3.Ball BearingIn this type of Bearing the steel ball are used in cage. The different types of Ball bearingsare Single row deep groove ball bearings, Double row deep groove ball, Bearings magnetotype ball bearing, Angular contact ball bearing, Double row angular contact ball bearings,Double row self aligning ball bearings. Ball bearings market has highest production andaccounts for 54% of total production of bearings.

4.Spherical Roller BearingThey are designed to manage high radial loads and perform consistently, even when marginallubrication, contamination, extreme speeds and critical-application stress are present.Potential applications of SRB are seen in power generation, oil field, mining and aggregateprocessing wind turbines, gear drives rolling mills etc. accounts for 3% of total production ofbaerings, lowest in the industry.

5.Cylindrical Roller BearingIn this type of bearings, the rollers racetracks are essentially cylindrical, however they may beground slightly curved in order to achieve small degree of flexibility. The rollers are guidedbetween two lips on either the inner race or the outer race. Ball Bearings have a point contacton the races whereas all types of cylindrical roller bearings have a line contact. Due to linecontact, the cylindrical roller bearings have very high radial load carrying capacity as comparedto ball bearings of the same size. It accounts for 6% of total production of bearings.


October 18, 2003 27

SECTOR RESEARCH Annexure2

Manufacturing Process

Step1Rolled / Forged Rings are procured from the suppliers; after this the process of TURNING isprovided by the outside vendors at the premises of the suppliers only, who are specialized inbearing races turning.

Step2Heat Treatment: Turned races are heat treated on salt bath furnaces for hardening andtempering. The process involves:Preheating—>Hardening—>Marquenching—>Annealing (Tempering)—>Washing

Step3Grinding

1.Rough Grinding of outer Dia and Bore2.Grinding of End Surfaces3.Finished Grinding of outer Dia and Bore4.Rough Grinding of the Tracks5.Finished Grinding of the Tracks6.Superfinsihing Grinding of the Tracks

Step4Demagnetizing and cleaning

Step 5Inspection and AssemblyAll the components are again checked thoroughly in different specified checks and segregatedfor different tolerance levels.

The assembly of the bearings consists of putting finish-graded rollers in the cage along withcone and closing with closing die in the press. The cup is separately put on the cone assembly.After this, the cone assembly and cup will be thoroughly washed in the washing machine byKerosene by pressure jets and then dipped in anti rust preventive oil.

Step 6

Packing: After the above steps, bearings are put in the pillow wrapping machine and puchpacked and sealed, then will be put in the cartoon manually.

Published in October 2003. All rights reserved. © India Infoline Ltd 2003-4.This report is for information purposes only and does not construe to be any investment, legal or taxation advice. It is not intended asan offer or solicitation for the purchase and sale of any financial instrument. Any action taken by you on the basis of the informationcontained herein is your responsibility alone and India Infoline Ltd(hereinafter referred as IIL) and its subsidiaries or its employees orassociates will not be liable in any manner for the consequences of such action taken by you.We have exercised due diligence in checking the correctness and authenticity of the information contained herein, but do not representthat it is accurate or complete. IIL or any of its subsidiaries or associates or employees shall not be in any way responsible for any lossor damage that may arise to any person from any inadvertent error in the information contained in this publication. The recipients ofthis report should rely on their own investigations. IIL and/or its subsidiaries and/or employees or associates may have interests orpositions, financial or otherwise in the securities mentioned in this report.India Infoline Ltd, 24 Nirlon Complex, Off Western Exp. Highway, Goregaon(E). Mumbai -63. Tel 2685 0101 / 0505. Fax 2685 0585

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5paisa.com is the trade name of India Infoline Securities Pvt Ltd (IISPL), a wholly ownedsubsidiary of India Infoline Ltd. Our research reports are available on First Call ResearchDirect/ Thomson Financial and Bloomberg (code: IILL). IISPL is a member of the NationalStock Exchange of India (NSE) and The Stock Exchange, Mumbai (BSE). IISPL is also aDepository Participant with NSDL.

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Reference No: IIL/SR04/03/01

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