Neutral on FAG Bearing - 4QFY2012 Result Update - Angel Broking

FAG Bearings (FAG) reported mixed results for 1QCY2012. The company reported strong top-line growth, driven by healthy performance by the automobile sector. The company's bottom line grew modestly on account of margin contraction, led by raw-material cost pressures, but it was aided by a significant increase in other income. We maintain our positive view on FAG, as we expect easing of interest rates to benefit the automobile and industrial sectors going ahead. However, a sharp run-up in the stock price (up 58% YTD CY2012) leaves limited upside from current levels. We, therefore, recommend a Neutral rating on the stock.

Margin pressures impact profitability: FAG posted strong 17.3% yoy (3.9% qoq) growth in its top line to Rs.363cr, led by healthy performance by the automotive sector. However, subdued activity in the industrial sector restricted growth to a certain extent. FAG's EBITDA margin declined sharply by 294bp yoy (59bp qoq) to 17.5% due to a significant jump in raw-material expenses. Raw-material expenses as a percentage of sales jumped by 510bp yoy during the quarter. However, a 230bp yoy decline in other expenditure as a percentage of sales arrested further margin contraction. As a result, operating profit registered flat yoy and qoq growth. Nonetheless, a significant increase in other income (up 79.2% yoy) supported net profit growth, which grew by 8% yoy (7.8% qoq) to Rs.46cr.

Outlook and valuation: We maintain our positive stance on FAG, considering its strong parentage, debt-free status and cash balance worth Rs.140/share on books. At Rs.1,654, the stock is trading at 12.5x CY2013E earnings, which is slightly expensive in our view. We recommend Neutral on the stock.

Source : Equity Bulls

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