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Sunday, July 08, 2001













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Bearings: Caught in the auto crash

B. Krishnakumar

THEY make sure that other industries run smoothly but their own is going has not been too smooth. This is the fate of companies in the bearings industry which faces demand slowdown, steady capacity build-up, mounting import threat and rising input costs.

With such pressures on earnings, the stock market has, predictably, been harsh to the companies. Top players such as SKF Bearings, FAG Bearings and NRB Bearings are now trading way below their historic highs.

Even the unprecedented stock market boom of 1999-2000 failed to drive the share prices of bearings companies. Considering the slowdown in the automobile sector and the persistent threat of cheaper imports, the outlook for the bearings industry is not positive.

There is no compelling reason to take equity exposure in the bearings industry. However, an improvement in the automobile output would warrant a second look at companies such as NRB Bearings and FAG, which have a presence in the auto sector.


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Twin-bearings market

The Rs 2,500-crore bearings industry consists of bimetal bearings and anti-friction bearings. The anti-friction bearings market can be further classified into two segments -- ball and roller bearings. Ball-bearings constitute the biggest segment (over 50 per cent) in volume terms in the industry.

Ball-bearings account for the bulk of the demand. Higher volumes have attracted more players to this segment. There is also the unorganised sector and the flow of cheaper imports.

The import factor

Being the market leader, SKF Bearings was the worst affected due to growing competition in the market. From Rs 486.7 crore in 1996-97, the company's turnover declined to Rs 373.27 crore for the year ended December 2000.

Apart from ball-bearings, certain bigger-sized bearings not produced in the country are important. Due to its technology-intensive nature, the unorganised sector presence is relatively low in the roller-bearing segment. NRB, National Engineering Industries, FAG and Timken India are the top players in the roller bearings market.

The volumes-auto link

The bearings industry is characterised by the presence of global majors, such as SKF and FAG, and companies from the unorganised sector on the other. There are about 19 units in the organised sector, with an installed capacity of about 152 million units. The domestic production accounts for about 70 per cent of the demand, the rest filled by imports.

For the bearings producers, volume is the key driver of earnings. Considering that the industry is highly capital-intensive, operating at the minimum economic volume assumes greater significance. A decline in the capacity utilisation level would lead to a major negative impact on the operational parameters considering the huge initial capital outlay.

The recent depressed trend in performance can in fact be attributed to the lack of volume growth due to slackening demand from the user segment and the steady flow of imports. The demand for the bearings industry flows primarily from the automobile sector, which accounts for about 50 per cent of the demand for bearings. The remaining is for accounted by other industries such as textile machinery, general engineering, electrical, and material handling and the Railways.

Therefore, the performance of the automobile sector has a major influence on the financial health of bearing companies. Given the nature of application and superior quality, high-value precision bearings do not require frequent replacement. As a result, much of the demand for bearings flows from the original equipment (OE) segment of the automobile market. Thus, a key role for automobile production role in determining the fortunes of bearings companies.

The financial performance of almost all top companies, including SKF, NRB, Antifriction and NBC, has been fluctuating in line with automobile output. For instance, NRB Bearings' turnover increased four per cent to Rs 118.09 crore, while the post-tax earnings jumped 59 per cent to Rs 12.17 crore for the year ended March 2000.

This improvement in performance is directly attributable to the sharp increase in automobile output in this period. Right from commercial vehicles to passenger cars and tractors, there was an all round increase in output in 1999-2000 which had a positive impact on the bearings industry.

However, the recent downturn in the automobile industry has hit industry majors. NRB's turnover declined 2 per cent to Rs 115.75 crore, while the post-tax earnings dropped 32 per cent to Rs 8.31 crore for the year ended March 2001.

Reliance on OEs

In stark contrast to the general auto ancillary product, the demand for the bearings flows primarily from the OE market, while the demand from the replacement market is not all that significant.

Considering the key role played by the OE segment, companies having a major presence in this market would have a more stable and better earnings profile. NRB and FAG Bearings are the majors in the automobile industry OE segment.

Of the two, FAG's performance has been more stable and impressive. The commissioning of the export-oriented unit, coupled with the decision to explore the replacement market, helped FAG report a superior performance compared to industry peers.

As for the replacement market, the demand constitutes a relatively lower proportion of bearings offtake in the automobile segment. However, companies cannot afford to ignore this segment, as the price realisations are relatively superior in the replacement market. The only problem, however, is the growing threat from the unorganised sector and the flow of cheaper imports.

Sources of friction

As with other auto ancillary products, the presence of a large number of producers in the unorganised sector has proved to be the bane of the bearings producers as well. About 10 per cent of the bearings market is catered to by the unorganised sector. This sector's ability to offer cheaper prices has made them a force in the replacement market.

Due to the emphasis on quality and the thrust on uninterrupted flow of supply, there is negligible threat from the unorganised sector in the OE segment of the automobile market. In the replacement market, the availability of cheaper products, especially in the lower-value segment, has caused problems to the organised sector players.

The excise duty of 16 per cent and other levies such as octroi and sales tax make the bearings produced by the organised sector costlier compared to the unorganised sector.

On the other hand, the steady reduction in the import tariff barrier has resulted in the flow of cheaper imports in segments where volumes are high. Meanwhile, the domestic producers have steadily augmented production capacities. Demand, however, has not kept pace due to the lacklustre performance of the automobile sector and the overall sluggishness in the industrial and economic growth in recent years.

As a result, bearings companies have not been able to consistently operate at the optimum economic capacity utilisation level. This has affected the financial performance of quite a few companies.

The impact has been more severe for relatively smaller companies such as Asian Bearings, Antifriction Bearings, Shriram Needle Bearings and Deccan Bearings. In the big league, SKF is the worst hit by the growing competition in the ball bearings market, while NRB and Fag have managed to get away with relatively less damage.

In this context, the recent Budget proposal to withdraw excise duty exemption to small-scale bearings producers assumes significance. If this proposal takes effect, it would have a major positive impact on the organised sector players.


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