1QCY2012 Result Update | Auto Ancillary

April 20, 2012

FAG Bearings
Performance Highlights
Y/E Dec. (` cr) Net sales EBITDA EBITDA margin (%) Reported PAT
Source: Company, Angel Research

NEUTRAL
CMP Target Price
1QCY11 310 63 20.5 43 % chg (yoy) 17.3 0.4 (294)bp 8.0 Angel est. 356 68 44 % diff. 2.1 (5.8) 4.4

`1,654 -

1QCY12 363 64 17.5 46

Investment Period

19.0 (147)bp

Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Auto Ancillary 2,750 0.5 1,792/928 2,972 10 17,374 5,291 FAGB.BO FAG@IN

FAG Bearings (FAG) reported mixed results for 1QCY2012. The company reported strong top-line growth, driven by healthy performance by the automobile sector. The companys bottom line grew modestly on account of margin contraction, led by raw-material cost pressures, but it was aided by a significant increase in other income. We maintain our positive view on FAG, as we expect easing of interest rates to benefit the automobile and industrial sectors going ahead. However, a sharp run-up in the stock price (up 58% YTD CY2012) leaves limited upside from current levels. We, therefore, recommend a Neutral rating on the stock. Margin pressures impact profitability: FAG posted strong 17.3% yoy (3.9% qoq) growth in its top line to `363cr, led by healthy performance by the automotive sector. However, subdued activity in the industrial sector restricted growth to a certain extent. FAGs EBITDA margin declined sharply by 294bp yoy (59bp qoq) to 17.5% due to a significant jump in raw-material expenses. Raw-material expenses as a percentage of sales jumped by 510bp yoy during the quarter. However, a 230bp yoy decline in other expenditure as a percentage of sales arrested further margin contraction. As a result, operating profit registered flat yoy and qoq growth. Nonetheless, a significant increase in other income (up 79.2% yoy) supported net profit growth, which grew by 8% yoy (7.8% qoq) to `46cr. Outlook and valuation: We maintain our positive stance on FAG, considering its strong parentage, debt-free status and cash balance worth `140/share on books. At `1,654, the stock is trading at 12.5x CY2013E earnings, which is slightly expensive in our view. We recommend Neutral on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 51.3 23.2 14.0 11.5

Abs. (%) Sensex FAG Bearings

3m 3.8 42.3

1yr (10.8)

3yr 58.2

75.1 438.7

Key financials
Y/E Dec. (` cr) Net sales % chg Adj. net profit % chg EBITDA margin (%) Adj. EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

CY2010 1,049 27.8 120.4 68.2 17.7 71.5 23.1 4.8 23.0 31.8 2.2 13.2

CY2011 1,312 25.2 175.8 46.1 19.6 105.8 15.6 3.8 27.0 35.9 1.8 9.8

CY2012E 1,531 16.7 196.1 11.5 18.8 118.0 14.0 3.0 24.0 31.5 1.5 8.2

CY2013E 1,748 14.2 220.7 12.6 18.5 132.8 12.5 2.5 21.9 28.9 1.2 6.8
24040 3800 Ext: 344

Yaresh Kothari
022-3935 7800 Ext: 6844 [email protected]

Please refer to important disclosures at the end of this report

FAG Bearings | 1QCY2012 Result Update

Exhibit 1: Quarterly performance

Y/E Dec. (` cr) Net sales Consumption of RM (% of sales) Staff costs (% of sales) Purchases of goods (% of sales) Other expenses (% of sales) Total expenditure Operating profit OPM (%) Interest Depreciation Other income PBT (excl. extr. items) Extr. income/(expense) PBT (incl. extr. items) (% of sales) Provision for taxation (% of PBT) Reported PAT PATM (%) Equity capital (cr) EPS (`)
Source: Company, Angel Research

1QCY12 363 130 35.7 27 7.4 92 25.4 51 13.9 300 64 17.5 0 6 11 68 68 18.8 22 32.2 46 12.7 16.6 27.9

1QCY11 310 99 31.9 23 7.4 75 24.1 50 16.2 246 63 20.5 0 5 6 64 64 20.7 21 33.1 43 13.8 16.6 25.8

% chg 17.3 31.5 18.4 23.5 1.0 21.6 0.4 28.6 18.0 79.2 6.6 6.6 8.0 8.0

CY2011 1,312 414 31.5 101 7.7 343 26.2 196 14.9 1,055 258 19.6 1 23 27 261 0 261 19.9 85 32.6 176 13.4 16.6 105.9

CY2010 1,049 320 30.6 80 7.6 292 27.9 167 16.0 860 189 18.0 1 20 17 184 3 182 17.3 60 33.2 122 11.6 16.6 73.1

% chg 25.2 29.2 26.6 17.6 17.1 22.6 36.6 41.6 12.3 61.5 41.5 43.5

44.8

44.8

Strong 17.3% yoy top-line growth: FAG posted strong 17.3% yoy (3.9% qoq) growth in its top line to `363cr, led by healthy performance by the automotive sector. However, subdued activity in the industrial sector restricted growth to a certain extent. We expect the companys top line to benefit going ahead, as easing of interest rates is likely to result in strong demand from the automotive and industrial sectors, the primary drivers of the companys performance.

April 20, 2012

FAG Bearings | 1QCY2012 Result Update

Exhibit 2: Strong top-line growth of 17.3% yoy

(`cr) 400 350 300 250 200 150 100 50 0 25.2 21.4 17.1 Net sales (LHS) 34.7 31.5 30.5 22.5 17.3 Net sales growth (RHS) 31.4 (%) 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0

1QCY10

2QCY10

3QCY10

4QCY10

1QCY11

2QCY11

3QCY11

4QCY11

Source: Company, Angel Research

EBITDA margin contracts sharply to 17.5%: For 1QCY2012, FAGs EBITDA margin declined sharply by 294bp yoy (59bp qoq) to 17.5% due to a significant jump in raw-material expenses. Raw-material expenses as a percentage of sales jumped by 510bp yoy during the quarter. However, a 230bp yoy decline in other expenditure as a percentage of sales arrested further margin contraction. As a result, operating profit remained flat on a yoy and qoq basis at `64cr.

Exhibit 3: EBITDA margin trend

(%) 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 15.3 19.1 17.7 19.9 20.5 20.3 19.8 18.1 17.5 62.0 EBITDA margin Raw material cost/sales

Exhibit 4: Bottom line boosted by other income

(` cr) 50 45 40 35 30 25 20 15 10 5 0 12.4 9.5 Net profit (LHS) 12.7 13.8 Net profit margin (RHS) 14.0 13.6 12.3 12.7 (%) 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0

59.9

58.0

56.0

56.5

56.3

58.2

61.8

61.6

11.5

1QCY10

2QCY10

3QCY10

4QCY10

1QCY11

2QCY11

3QCY11

4QCY11

1QCY12

1QCY10

2QCY10

3QCY10

4QCY10

1QCY11

2QCY11

3QCY11

4QCY11

Source: Company, Angel Research

Source: Company, Angel Research

Net profit up 8% yoy aided by other income: FAG reported modest 8% yoy (7.8% qoq) growth in its net profit to `46cr, as a sharp contraction in EBITDA margin impacted profitability. However, a 79.2% yoy jump in other income to `11cr benefitted the companys bottom-line growth.

April 20, 2012

1QCY12

1QCY12

FAG Bearings | 1QCY2012 Result Update

Investment arguments
Second-largest player with a ~15% market share: FAG is the second-largest player in the Indian bearing industry, with a total market share of ~15%. The company is also a market leader in the spherical roller bearing segment, with a market share of ~55%. FAG is a member of the Schaeffler Group, Germany, a global leader in the rolling element bearing segment and one of the most prominent industry players. We believe healthy demand in the auto and industrial segments will aid FAG in registering a CAGR of ~15% in its net sales over CY2011-13E. Industry outlook likely to improve on interest rate easing: We believe there is likely to be an uptick in the companys industrial segment in the next three-four quarters, driven by increased demand from capital goods companies. The companys auto segment is also likely to grow, led by a 12-14% CAGR in the auto sectors volumes over FY2012-14E. The company has a strong customer base (such as Maruti, M&M, Tata Motors, GM, Ford and Daimler Chrysler) in this segment. Strong fundamentals: FAGs net asset turnover remains high (~7x in CY2011) due to largely depreciated assets. The companys strong business model enables it to record robust and consistent RoCE of ~30%. Cash flow generation is also expected to remain healthy going forward.

Outlook and valuation

We maintain our positive stance on FAG, considering its strong parentage, debt-free status and cash balance worth `140/share on books. We expect FAG to register a healthy CAGR of ~15% in its net sales and ~12% in its net profit over CY2011-13E. However, a sharp run-up in the stock price (up 58% YTD CY2012) leaves limited upside from current levels. At `1,654, the stock is trading at 12.5x CY2013E earnings, which is slightly expensive in our view. We, therefore, recommend Neutral on the stock.

Key risks
1) A sharp revival in demand in the automotive and industrial sectors post the easing of interest rates poses an upside risk to our earnings estimates and, therefore, the target price. 2) Adverse currency movement can negatively affect FAGs trading business. 3) Cheap imports from China could affect business of bearing players like FAG.

Exhibit 5: Key assumptions

Y/E Dec. Ball and roller bearings (mn units) yoy chg (%) Utilization (%)
Source: Company, Angel Research

CY08 46.0 1.5 93

CY09 50.2 9.1 95

CY10 67.2 33.8 135

CY11 78.7 17.1 154

CY12E CY13E 89.6 13.9 160 100.3 11.9 166

April 20, 2012

FAG Bearings | 1QCY2012 Result Update

Exhibit 6: One-year forward P/E band

(`) 2,500 2,000 1,500 1,000 500 0 Share Price (`) 4x 8x 12x 16x

Exhibit 7: One-year forward P/E chart

(x) 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 One-yr forward P/E Five-yr average P/E

Sep-04

Jul-07

May-10

Sep-05

Sep-06

Jun-08

Jun-09

Jul-08

May-10

May-11

Aug-05

Aug-06

Apr-11

Oct-03

Apr-12

Dec-02

Jan-02

Aug-07

Jun-09

Nov-03

Source: Company, Bloomberg, Angel Research

Source: Company, Bloomberg, Angel Research

Exhibit 8: Auto Ancillary Recommendation summary

Company
Amara Raja Automotive Axle^ Bharat Forge* Bosch India# Exide Industries FAG Bearings Subros
#

Reco.
Accumulate Neutral Buy Neutral Buy Neutral Buy Neutral

CMP (`)
315 526 320 8,674 130 1,654 180 35

Tgt. price (`)

345 372 155 216 -

Upside (%)
9.5 16.3 19.0 19.8 #

P/E (x) FY13E

10.7 10.9 14.3 22.0 17.2 14.0 13.5 8.3

EV/EBITDA (x) FY13E

6.1 6.0 6.8 13.9 9.6 8.2 6.1 4.4

Oct-04

RoE (%) FY13E

26.5 26.8 21.0 20.1 19.4 24.0 26.2 10.3

FY11-14E EPS CAGR (%)

23.8 23.7 28.7 17.1 6.2 22.9 22.0 1.5

FY14E
9.6 9.5 12.0 19.7 14.6 12.5 10.0 7.0
^

FY14E
5.2 5.2 5.7 11.9 7.7 6.8 4.8 4.1

FY14E
23.6 25.2 21.0 18.7 19.8 21.9 28.4 11.8

Motherson Sumi*

Source: Company, Angel Research; Note: * Consolidated Results;

December year end;

September year end

April 20, 2012

Apr-12

FAG Bearings | 1QCY2012 Result Update

Profit & loss statement

Y/E Dec. (` cr) Gross sales Less: Excise duty Net Sales Total operating income % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation & Amortisation EBIT % chg (% of Net sales) Interest & other Charges Other Income (% of PBT) Extraordinary (Expense)/Inc. PBT Tax (% of PBT) PAT (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg CY08 816 69 762 762 17.0 600 407 59 66 67 162 14.9 21.3 21 142 16.3 18.6 0 2 1.4 (3) 146 52 35.3 95 92 17.0 12.0 55.2 55.2 17.0 CY09 845 46 820 820 7.6 708 506 63 63 76 113 (30.7) 13.7 20 93 (34.8) 11.3 1 6 5.9 (8) 106 34 32.2 72 64 (30.2) 7.8 38.5 38.5 (30.2) CY10 1,113 73 1,049 1,049 27.8 862 613 51 79 120 186 65.3 17.7 20 166 79.5 15.8 1 14 7.8 (2) 181 60 33.4 120 119 85.6 11.3 71.5 71.5 85.6 CY11 1,390 90 1,312 1,312 25.2 1,055 757 55 100 142 258 38.5 19.6 23 235 41.7 17.9 1 27 10.4 261 85 32.6 176 176 48.1 13.4 105.8 105.9 48.1 CY12E 1,622 105 1,531 1,531 16.7 1,243 894 65 117 167 288 11.7 18.8 29 259 10.1 16.9 2 35 12.0 293 97 33.0 196 196 11.4 12.8 118.0 118.0 11.4 CY13E 1,852 120 1,748 1,748 14.2 1,425 1,021 75 135 194 323 12.4 18.5 31 292 12.9 16.7 2 39 11.7 329 109 33.0 221 221 12.6 12.6 132.8 132.8 12.6

April 20, 2012

FAG Bearings | 1QCY2012 Result Update

Balance sheet
Y/E Dec. (` cr) SOURCES OF FUNDS Equity Share Capital Reserves & Surplus Shareholders Funds Total Loans Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 400 252 148 15 0.3 385 64 48 274 138 247 411 413 272 142 7 0.3 461 173 78 210 143 317 466 419 278 141 9 0.3 628 288 81 258 201 426 576 475 297 178 107 0.0 712 233 102 377 264 448 733 600 326 275 30 0.5 900 394 122 384 295 605 910 644 357 287 32 0.6 1,125 547 140 438 333 791 1,111 17 388 405 6 411 17 445 462 5 466 17 557 573 3 576 17 713 730 3 733 17 890 907 3 910 17 1,091 1,108 3 1,111 CY08 CY09 CY10 CY11 CY12E CY13E

April 20, 2012

FAG Bearings | 1QCY2012 Result Update

Cash flow statement

Y/E Dec. (` cr) Profit before tax Depreciation Change in Working Capital Less: Others Other income Direct taxes paid Cash Flow from Operations (Inc.)/Dec. in Fixed Assets (Inc.)/Dec. in Investments Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balance Closing Cash balance CY08 CY09 146 21 (66) (4) (2) (52) 43 (41) 1 2 (38) 8 (13) (5) (0) 64 64 106 20 39 39 (6) (34) 163 (5) 0 6 1 9 (64) (55) 110 64 173 CY10 181 20 6 (0) (14) (60) 132 (8) 0 14 7 10 (33) (24) 115 173 288 CY11 CY12E CY13E 261 23 (76) (15) (27) (85) 81 (155) 0 27 (127) 19 (27) (8) (55) 288 233 293 29 4 (35) (97) 193 (48) (0) 35 (13) 19 (19) 160 233 394 329 31 (34) (39) (109) 179 (46) (0) 39 (7) 19 (19) 153 394 547

April 20, 2012

FAG Bearings | 1QCY2012 Result Update

Key ratios
Y/E Dec. Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value DuPont Analysis EBIT margin (%) Tax retention ratio (x) Asset turnover (x) RoIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating RoE (%) Returns (%) RoCE (Pre-tax) Angel RoIC (Pre-tax) RoE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT/Interest) (0.2) (0.4) 295.5 (0.4) (1.5) 132.2 (0.5) (1.5) 186.5 (0.3) (0.9) 186.6 (0.4) (1.4) 169.2 (0.5) (1.7) 167.3 2.0 62 52 52 72 2.0 58 50 53 73 2.5 40 42 53 49 2.9 40 48 57 49 2.8 42 46 59 51 2.8 43 46 60 48 38.6 41.1 25.4 21.1 31.8 14.8 31.8 58.0 23.0 35.9 47.3 27.0 31.5 50.4 24.0 28.9 52.0 21.9 18.6 0.6 2.5 30.4 30.4 11.3 0.7 2.6 19.7 19.7 15.8 0.7 3.6 38.3 38.3 17.9 0.7 3.3 40.5 40.5 16.9 0.7 3.0 34.3 34.3 16.7 0.7 3.2 36.4 36.4 55.2 55.2 67.6 4.5 242.3 38.5 38.5 55.1 4.5 276.4 71.5 71.5 84.5 5.0 343.7 105.8 105.9 119.4 10.0 438.0 118.0 118.0 135.3 10.0 544.2 132.8 132.8 151.4 10.0 665.3 30.0 24.5 6.8 0.3 3.3 16.5 6.5 43.0 30.0 6.0 0.3 3.0 22.9 5.5 23.1 19.6 4.8 0.3 2.2 13.2 4.3 15.6 13.9 3.8 0.6 1.8 9.8 3.4 14.0 12.2 3.0 0.6 1.5 8.2 2.6 12.5 10.9 2.5 0.6 1.2 6.8 2.0 CY08 CY09 CY10 CY11 CY12E CY13E

April 20, 2012

FAG Bearings | 1QCY2012 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

FAG Bearing No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

April 20, 2012

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