From THE HINDU group of publications
Sunday, July 08, 2001


Industry | Next

How will things roll

B. Krishnakumar

CONSIDERING that volume growth is the key driver of earnings rather than an increase in unit realisation, companies operating at higher capacity would enjoy better profitability and a healthier financial outlook.

However, many companies have not been able to improve the capacity utilisation level due to the demand dry-up and the huge capacity build-up over the recent years. Further, supplies have increased also because of imports.

Given that the total demand in the country is relatively small compared to the global market size, bearing makers have to turn to exports market to survive. Realising this, a few have already taken efforts to expand their global presence.

NRB Bearings has been emphasising on exports in recent years, while FAG has commissioned a 100-per-cent export-oriented unit (EOU) with a positive impact on its performance. The relatively low capacities compared to global majors is a major hitch for domestic producers in expanding their global presence.

As more small and medium units turn sick financially, takeovers and mergers could happening the bearings industry. NRB Bearings has taken the lead by taking over Shriram Needle Bearings. More such takeovers and acquisitions could help existing companies expand their production base and take advantage of economies of scale.

Outlook: Low capacity utilisation, dwindling demand and rising input costs have been the major impediments to growth for the domestic bearings industry. There is no evidence of an improvement either in the automobile sector or the industrial output. Thus, the performance of the bearings companies is unlikely to improve in the near-term.

However, the rectification of anomalies in the duty structure and the removal of sops extended to small-scale producers could help organised sector producers. In the duty structure, both the raw material (bearings grade steel) and the end-product attract almost the same level of import duty. The rectification of this anomaly would provide some relief to the industry.

Moreover, the removal of the sops extended to the small-scale sector producers could help the organised sector producers operate at higher volume. The revival of the automobile sector and an improvement in industrial growth would be the other factors to look forward to.

Only companies operating at higher capacity and with a presence in the automobile sector would manage to post some sort of growth. The thrust towards exports would be the key to achieving volume growth.

From an investment perspective, there is no major justification for taking equity exposure in the bearings industry. However, investors need to keep a tab on the automobile output. Any signs of an improvement in the auto sector would warrant short-term exposures in companies such as NRB Bearings and FAG Bearings. Other companies do not merit a place in the equity portfolio.

Section  : Industry
Next     : Bearings: Caught in the auto crash

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