NRB Bearings - Tough domestic market, export-led growth; Buy - Anand Rathi

Domestic sales continue to slow down, exports expected to grow. We expect NRB Bearings' sales to have risen 6% yoy, to Rs. 1.5bn, despite a decline in offtake in the domestic auto segment (OEM clients). Exports would have grown yoy at a healthy pace on account of the company's export-focused strategy. Sluggish growth in the domestic auto sector, its mainstay, would have kept the yoy margin slightly down.

Margin set to decline 129bps. The EBITDA margin is expected to decline 129bps yoy, chiefly due to lower fixed-cost absorption. Ahead, with an expected rise in volumes of high-margin exports, the margin is expected to have expanded to over 17%. The costs involved in exports a present are high. The decline in the domestic business was somewhat counter-balanced by more exports. The long-term focus is now on increasing export revenue. In FY14 exports are anticipated to have clocked Rs. 2bn (FY13: Rs. 1.5bn). From 3QFY13 NRB Industrial Bearings has been hived off into a separate company.

Short-term outlook weak; exports, the silver lining. While revenue and EBITDA growth continues in 3QFY14, higher revenue from fresh export clients should pick up, and the domestic business, which has bottomed out, start to inch up. Economic growth is expected to improve in the next few quarters, auguring well for the company. Besides, its exports business continues to gain size. This could improve margins and reduce working capital required. For 3QFY14 we expect PAT to decline 16.5% yoy, to Rs. 123m.

Our take. With brightening prospects for the economy and NRB too expected to look up, we maintain a Buy. The stock trades at 7x one-yearforward EPS. Our revised target is based on 9x FY15e EPS. Risks: Keener competition, higher input costs.

Source : Equity Bulls

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