SKF India - Tough demand environment; good long-term bet; Hold - Anand Rathi

4QCY13 sales to grow 5%. We expect SKF India's 4Q revenues to be Rs. 5.4bn (up just 5% yoy). This growth would have come on last year's lower base. Curtailed demand continues in both its key target markets, industrials and automotives. We expect an improvement in revenue from exports and from the auto division. Amidst these adversities, the company is focusing on tightening its working-capital requirement. We had earlier expected demand to pick up in 2HCY13 but now believe that demand will pick up in CY14.

Margins expected to improve 70bps yoy. In the past few quarters, margin pressures have arisen due to slowing revenue growth and the company's inability to pass on higher costs. With facilities underutilised, the margin will now be contained, primarily due to lower fixed-cost absorption. We expect the 4Q EBIDTA margin to come at 9.2%, 70bps higher yoy. This improvement is on account of lower raw-material costs.

Profit expected to grow 12.5%. We expect profit to grow 12.5% yoy, to Rs. 362m, down 22% qoq. Other income is expected to be Rs. 170m, 13% higher than what it was in 4QCY12.

Tightening working capital. In the tough situation today, the company is focusing on tightening working capital required. It has been generating strong operating cash-flows over the years. We expect revenue and profit CAGRs over CY12-14 of 9% each.

Our take. A slowdown is evident in the industrial and automobile segments. A debt-free company (Rs. 3bn in cash at end-CY12), it has generated strong operating cash-flows over the years. We value the stock at a one-year forward- PE of 15x CY14 (on par with its past two-year average), at a target of Rs. 641. With no short-term trigger, the long-term story is unharmed. Risks. Slowdown in industrial activity, auto sales; commodity price fluctuations and increase in imports.

Source : Equity Bulls

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