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Sunday, July 08, 2001













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Of bearings that matter

B. Krishnakumar

Recommendations

SKF Bearings: Sell

FAG Bearings: Hold

NRB Bearings: Hold

THE bearings industry is passing through a rough phase. Demand has been affected by a slowdown in almost all user-segments, including automobiles, engineering and the electrical industries.

Considering that the auto sector is yet to recover, and the slump in production and industrial activity, the outlook for the industry is not too bright.

SKF Bearings, NRB Bearings and FAG Bearings are the top players. From investment perspective, there appears to be hardly any reason to look beyond these three companies. Even among the three, SKF does not warrant closer attention at this point due to its lacklustre performance and major presence in the highly competitive ball-bearing market.

FAG Bearings would be the top choice on account of the recent growth in financial performance. NRB needs to be watched closely as its financials will improve significantly once the auto industry's recovery is underway.


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NRB Bearings

NRB Bearings is the market leader in the needle-bearing segment. It also holds a prominent position in the spherical-roller and cylindrical-roller-bearing segments. It also produces ball-bearings, but its contribution to the turnover is insignificant.

NRB has a technical collaboration with Nadella of France. It derives a major chunk of its revenues from the automobile market. The company is an original equipment supplier to auto majors such as Tata Engineering, Ashok Leyland and Maruti Udyog. It also has a presence in the two-wheeler and tractor markets.

The company derives a sizeable chunk of its revenues from the OE segment of the auto market. In recent years, NRB has shifted its focus to the export market. Financially, the company has managed to report a performance that is relatively better if the overall industry scenario is taken into account.

Due to the sharp slowdown in the automobile production, the company reported a three per cent decline in turnover to Rs 135.2 crore and a 32 per cent drop in post-tax earnings to Rs 8.31 crore. On an equity base of Rs 9.69 crore, the per share earnings was Rs 8.57.

The company's performance would continue to remain under pressure as the automobile industry is still in the throes of a major slowdown. The setting up of production facilities by INA Bearings of Germany is another worrying factor as NRB has all along been a dominant force in the needle-bearing market.

From the investment perspective, the company's share price declined sharply from the highs recorded in 1996-97. As the performance is not likely to improve in a hurry, investors can defer taking equity exposures in NRB Bearings. Any evidence of a recovery in auto production could be used to take equity exposures in limited doses in NRB.

FAG Bearings

The company is a subsidiary of the German major -- FAG Kulgelfischer Georg Schafer AG. It manufactures ball-bearings, cylindrical-roller-bearings and spherical-roller-bearings. It has a major presence in the original equipment (OE) segment of the automobile industry. As a result, the financial performance is influenced by the production trend in the automobile sector.

In the OE segment, FAG is a major supplier of bearings to Maruti Udyog, Tata Engineering and Bajaj Auto. It has a presence in the export market as well. Exports account for about 20 per cent of the revenues, and the company is also trying to make inroads into the replacement market as well.

Financially, the company has managed to post strong growth for the year ended December 2000. The turnover improved 11 per cent to Rs 210.09 crore, while the post-tax earnings rose 79 per cent to Rs 12.88 crore. On the equity base of Rs 16.62 crore, the per share earning works out to Rs 7.7.

The cost control initiatives coupled with the retirement of high-cost debt and a flat trend in staff cost helped the company stay afloat even amidst the lacklustre trend in the user industry. The flow of funds consequent to the allotment of shares to its German partner helped the company contain its interest cost. A VRS package in earlier years has helped the company keep the staff cost under check.

Though the exposure to the OE segment is a major cause of concern, the company is actively taking steps to gain a better footing in the replacement market. This would bring greater stability to its earnings stream. Moreover, FAG Bearings is also being considered as a potential sourcing base by the German parent. This is a positive development from the long-term perspective. Given these factors, FAG Bearings appears to be relatively better placed compared to its peers in terms of operating at higher capacity utilisation.

From the investment perspective, a strong presence in the automobile market, the technical backing of global major coupled with the improvement in performance are positive features. Long-term investors could hold on to their existing stake. Fresh buying may be contemplated on evidence of a pick-up in automobile production.


Section  : Industry
Previous : Basics of bearings
Next     : `Govt.  must help tap outmarkets' -- Mr
           Trilochan  Singh  Sahney, Chairman and
           Managing Director of NRB Bearings

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