FAG Bearings - 1QCY2013 Result Update - Angel Broking

FAG Bearings (FAG) reported a disappointing set of results for 1QCY2013 as EBITDA margins declined 530bp yoy owing to raw-material cost pressures and lower utilization levels. Due to the lower-than-expected performance and continued margin pressures, we revise our earnings estimates downwards for CY2013/14 by 16.4%/13.4%. We expect the company's performance to improve going ahead, led by easing of interest rates in CY2013, which is expected to revive demand in the automotive and industrial sectors. Nevertheless, at 12.2x CY2014E earnings, we believe the stock is fairly valued, leaving limited room for any potential upside. Hence, we recommend a Neutral rating on the stock.

Below par 1QCY2013 performance: For 1QCY2013, FAG's top-line posted a decline of 6.5% yoy (2.2% qoq) to Rs. 340cr, which although was slightly higher than our expectation of Rs. 329cr. The top-line performance continued to be impacted by the slowdown in the automotive and industrial sectors. The operating profit fell significantly by 34.8% yoy (flat qoq) as EBITDA margins declined sharply due to raw-material cost pressures and lower utilization levels. The raw-material cost and employee expenditure as a percentage of sales surged 165bp and 140bp yoy, respectively. Further, due to lower operating leverage benefits, other expenditure as a percentage of sales rose by 230bp yoy. Led by a weak operating performance and lower other income, the net profit declined 45% yoy (14.3% qoq) to Rs. 25cr, lower than our expectation of Rs. 30cr.

Outlook and valuation: We maintain our positive stance on FAG, considering its strong parentage, debt-free status and cash balance worth Rs. 117/share on the books. Nevertheless, at 12.2x CY2014E earnings, we believe the stock is fairly valued, leaving limited room for any potential upside. Hence, we recommend a Neutral rating on the stock.

Source : Equity Bulls

Keywords