There seems to exist a buying opportunity with SKF Bearing. The largest player in India - the company is riding the expected increase in automobile sales in India and also the use of India as an outsourcing hub by other foreign car manufacturers. Additionally the company has now moved into other areas like marine, industrial, infra etc. (although %age contribution is very low at the moment). Annual Report (here)
The scrip is available at 309 rupees. The 52-week high for the scrip is 513 rupees and the 52-week low is 260 rupees. The brief financials of the company are enclosed -
Share capital : Rs. 52.73 crores
Face Value : Rs. 10 per share
Net Current Assets : Rs. 348 crores (Dec-07)
Debt : Nil
NCAV : Rs. 66 per share
CMP/NCAV : 4.68 (hence, non-Grahamian)
Book value : Rs. 103 per share
CMP/BV : 3.0 (not encouraging)
Enterprise Value : Rs. 1629 crores
EV/EBIT : 6.2 (encouraging)
1. Sales, operating profits and net profits have grown at 35%, 34% and 41% respectively. Given the size of the company, it will be difficult to sustain the same level of growth in sales. 2007 v/s 2006 sales growth was only 16% and I expect that to continue for FY2008. However, operating and net profits grew at 54% and 58% respectively. Again, 50 plus number might not be the deal this year. I have factored about 25% growth in op/net profits coming out of economies (new clients) but stained by high raw material price and slightly lower short-term demand.
2. Operating margins have improved over the last 3 years (13.4%, 11.4%, 15.1%). Over the last 3 quarters, the margins has improved to average 16%. NPM too has kept pace (6.9%, 6.8%, 9.2%).
3. From a price-earning view point, I was interested in mapping the historical PE ratio of the stock. I took the Dec 31st prices from all years from 2003 to 2007. The PE ratios have been quite sporadic (18.1, 15.1, 23.9, 13.6, 15.1). For one, the PE ratio in most years has been over 15.
To see if there was any near term opportunity, I further checked the PE ratio quarter-on-quarter. The results are enclosed :
Dec 06' > Price : 272, PE : 14.2
Mar 07' > Price : 319, PE : 15.0
Jun 07' > Price : 435, PE : 18.0
Sep 07' > Price : 388, PE : 14.1
Dec 07' > Price : 457, PE : 15.0
The current price (22 Apr) is Rs. 309 and hence, the PE ratio is 10.07. This represents an opportunity to invest in SKF India where the price-earning has predominantly been in the 15 range. In other words, there is a high probability that the price of SKF India will tend towards the 13-14 PE mark in the short term. This represents a potential price rise of almost a 100 rupees.
To confirm, I checked a Feb 2008 analyst report by Sushil Research (to be honest, I have not heard of this research house before). On the basis of the company's Q4 results (Oct-Dec 2007), the research house had claimed a BUY on the stock with a price target of Rs. 540 (Feb 22 CMP : Rs. 355). Another report published on 26 Nov, 2007 by Hem Securities gave a BUY call for SKF India with a target of Rs. 612 (the CMP on that date was Rs. 445).
PS: There was interesting news item in June 2007. It read "SKF India plunged 15.40% to Rs on 398 on announcement by parent SKF Group that it will make an investment of Rs 270 crore to build a greenfield factory in India for manufacturing large size bearings. The factory is expected to start production in 2008." ... since when did the Indian stock market consider capex commitments as bad news?
Wednesday, April 23, 2008
SKF India
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14 comments:
I find it strange that the stock got beat by 15% on news that the company is investing in a new plant. Thought the stock should go up. maybe there was some other news on that day
Hi Shankar
Primarily because the large bearing plant investment is to be routed through there 100% owned private ltd company and not the lsied company. This is my understanding.
Ninad
Hi Ninad,
It's true that they wanted the investment to be done through a "100% owned" private limited company. But arent the spoils or gains of a 100% subsidiary reflected in the consolidated numbers of the listed entity?
Hi
Not if the subsidairy is a wholly owned subsidairy of the parent and not the Indian company.
Ninad
Hi
Have u analysed the Q1 results of SKF.
What is u r take on the results.
Cheers
Ninad
Hi Ninad,
Just looked at SKF's Q4 results .. about 35 crs of profits, which is in line with estimates. No surprises there.
Warm Regards
Shankar
hi shankar
the numbers for SKF look good and the valuation also attractive. maybe the market is reacting to the typical MNC management where the preference for new products and growth is given to 100% subsidiary and not to the listed one.
in case of SKF will be important to see what plans the management has for the listed sub
regards
rohit
Hi Shankar
Net Profit Numbers
Mar 07 - 36 crores
June 07 - 40 crores
Sept 07 - 43 crores
Dec 07 - 40 crores
Mar 08 - 37 crores
Net Profit has been decelerating over the last few quarters. The topline is also slowing down. That is a concern
Rohit
More than the fact that the large bearings ( industrial bearings ) plant is coming up in the wholly owned subsidiary, I think the market is worried about the Uttarakhand plant which has been setup to cater to the auto sector. I think it was setup keeping in mind the new Hero Honda plant in Uttaranchal. With demand slowing down in the auto space the market might be worried about the additional capacity being built up.
BTW I own a bit of this stock. Intrinsically i will go with both of you that at this price there is nothing much to loose but maybe the upside is capped.
Cheers
Ninad
Hi Ninad,
Here's how I look at it :
Year : Sales / OP / NP
2003 : 562 / 72 / 32
2004 : 698 / 110 / 56
2005 : 923 / 124 /64
2006 : 1,494 / 170 / 101
2007 :1,734 / 262 / 160
EPS has increased Y-on-Y (7.1, 12.5, 12.1, 19.3, 30.4)
The qtrly performance (sales) is enclosed
Dec 05 : 249 crs; 10 crs
Mar 06 : 295 crs; 22 crs
Jun 06 : 327 crs; 25 crs
Sep 06 : 339 crs; 22 crs
Dec 06 : 379 crs; 31 crs
Mar 07 : 359 crs; 36 crs
Jun 07 : 401 crs; 40 crs
Sep 07 : 389 crs; 37 crs
Dec 07 : 420 crs; 40 crs
Mar 08 : 392 crs; 37 crs
Ofcourse, we dont want to commit the folly of running this on an excel sheet. The qtrly spikes are often the bane of growing big, when a small tweek in variables can affect top & bottomline.
So let's pick some individual aspects -
a) Dividend : the company earns enough to fork a 60% dividend giving us an yield of 3% tax free
b) I can see a price anomaly which has occurred on account of brewing news of lower car sales due to high interest rates + appreciation of the rupee. On pt 1, lower cost alternatives are expected to stabilise any fallback in demand. On pt 2, SKF India's exports constitute only 5.1% of it's sales.
Additionally, the franchise is an improving one. SKF India increased its market share from 28% in Dec, 2005 to 30% in Dec, 2006 to 31% (est) in Dec, 2007.
On the question of sales going down .. we have to look at it over a 4 quarter period. A downside in one quarter might be on account of auto manuf having excess inventory or some product blips in SKF or some sales that might not have been accounted yet etc.
Now, this is not saying that the stock price would not go down or the next quarter will not be a shocker. It's too difficult to predict that .. but looking at a stock over a period of time (moving in a uniform way) makes me comfortable.
Warm Regards
Shankar
Hi Shankar
Let me at the outet state that I own the stock and I like the company and have bought the stock around the price point that you have picked it up and largely for the same reasons that u have stated.
I wouldnt exit a stock for a single quarter slowdown in numbers and I agree with you on that.
I m just revisiting some of the assumptions and maybe look at the next quarter numbers to see the broader trend.
Key concerns ...
1) Steel prices are going thru the roof so will affect bottomline.
2) The uttarakhand plant is slated to be operational in end March 08 hence the capatilised expenses will get expensed out resulting in higher depreciation. This plant has been setup specifically to cater to auto and auto numbers dont look encouraging. So we have a situation of lower demand and additional capacity coming on stream. Classic cyclical phenomenon.
Stock prices are really not my concern. If the fundamntals run their course then any downward movement in stock prices for me is a buying opportunity. If SKF maintains its last years bottomline this year I m good with the stock at current valuation.
Cheers
Ninad
Hi Ninad,
Ofcourse, there will be a higher depreciation cost on account of the investments. As given in it's website, SKF India is investing Rs. 400 crores for new plants by 2011. Interest charges and depreciation need to be subtracted and incremental profits (net of taxes) must be added back.
Lets take ballpark numbers, on 150 crores :
Depreciation to be around 30 crs and say 15 crs in finance charge. The hit for this year is 45 crs.
Now it's difficult to estimate the increase in profits here .. but lets do some sensitivity.
Desired net profit = 160 crs
Tax rate = 33%
Profit before tax = 240 crs
Add: dep + int = (30+8)+15 = 53 crs
Operating profit = 293 crs
Current OPM = 15%
Sales = 1940 crs
Note: 8 crs has been added to depreciation as it is the current depreciation deducted in books. This will continue.
The LY (Jan - Dec 07) sales were Rs. 1734. The eternal question is : will SKF India be able to achieve a) the incremental sales growth of 11.8%, b) while maintaining an OPM of 15.0%?
Possibly the market is thinking that SKF India will be hit as demand for bearings will drop (on account of low auto sales).
Warm Regards
Shankar
Hi Shankar
The eternal question that you have posed is the question that concerns me.
Doesnt mean that i will exit the stock but i will watch how things unravel.
Cheers
Ninad
I was browsing the net on some info on SKF (I hold some stock). And I stumbled upon your blog and the analyses, the exchange of comments.
I was impressed by the down to earth - retail oriented analysis (I used to be a credit analyst in a Bank once) and instantly liked the candour. I could identify myself with it. In my opinion, this is among the best blogs I have seen.
Thanks guys,
I will surely book mark it.
And my two bits on the fundamental strength of a company and the market perception. I did some simple research on three companies - who are intrinsically sound and have a fairly good revenue model with an expansion plan. But, the market is too pre-occupied with prime-movers and hardly bother to look at them. So sometimes, I wonder, unless the Market is ready to evince an interest, what avail of the fundamental worth of a stock?
The stocks I refer to are 1) Lakshmi Precision works 2) Sangam India 3) Finolex Cables
oruaann
Hey Shankar,
Do u have the sales break-up for the company, interms of contribution from the auto sector and that from industrial segment.
Further, the sharp jump in sales as seen in the last few years has come from its direct delivery to customer concept. I think u shud read the 2006 AR. They've made a mention of this model in that Annual Report. Also, have a look at their purchase of finished goods to sales ratio. Its in the north of 35%.
Setting up of a separate 100% subsidiary in India can possibly mean that SKF India does not get orders under the direct delivery to customer model (which it thus far imported and supplied in the domestic market)...thereby resulting in a sharp drop in sales / profits? Have u looked at this aspect?
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