SKF India - Long-term bet; Buy - Anand Rathi

Muted revenue growth, as expected. SKF India (SKF) reported revenue of Rs. 5.2bn (down 13.8%, yoy, 4% below our estimates). Decline in sales was primarily on account of lower demand from its key target market i.e. auto and industrial. For CY12, contribution from export came down to 6.5%. We had expected a sharper decline in the export and industrial segments. Management is focused on tightening its working capital requirements. We expect the demand to pick up in 2HCY13.

High other expenditure, low utilisation. Other expenditure was up 100bps, causing margin erosion of 185bps, yoy. In the past few quarters, SKF has been facing margin pressures due to slowing revenue growth and its inability to pass on higher costs. With facilities underutilized, margins will remain muted, primarily owing to lower fixed cost absorption. Depreciation was up 16% yoy due to regular capex incurred in CY12. Effective income tax rate is however down 556bps yoy, restricting PAT decline to 20.3% yoy, to Rs. 322m (21% below estimated). Other income came at Rs. 151m, up 235% yoy.

SKF has maintained dividend per share at Rs. 7.5 since the past three years despite almost similar earnings. We expect revenue CAGR of 15.5% over CY12-14e and PAT CAGR of 22%.

Our take. A debt-free company, with Rs. 2.2bn in cash at end CY11, SKF has been generating strong operating cash flow over years. We value it at a oneyear forward PE of 15x (on par with its past two-year average), at price target of Rs. 724. Though there is no near-term trigger, the long-term story remains intact.

Risks. Slowdown in industrial activity, auto sales; commodity price fluctuations and increase in import.

Source : Equity Bulls

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