INDIAN BEARINGS INDUSTRY

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1 ICRA RESEARCH SERVICES INDIAN BEARINGS INDUSTRY Uptick in Industrial as well as automotive industry augurs well for bearings manufacturers Contacts: Subrata Ray Ashish Modani ICRA LIMITED P a g e 1

2 WHAT S INSIDE? 1. Overview 2. Trends: Indian Bearing Industry Current market size for domestic bearing industry and segment wise revenue breakup Key players in domestic bearing market and their market share Details on various types of bearing, their domestic market size and applications India emerging as export hub for global bearings market Growth trend in domestic bearings market Cost structure of domestic bearing industry and sensitivity to raw material prices Key bearing components and their estimated market size SWOT analysis of domestic bearing industry Regulatory environment and duty structure in India 3. Outlook: Indian Bearing Industry 4. Perspective: Global Bearings Industry Key players in global bearing market Segment wise and geography wise revenue mix 5. Insight: Automotive industry Past trend in global Passenger vehicle and Commercial Vehicle market and outlook for key markets Outlook for Indian Automotive Industry for various automotive segments Indian Auto Component Industry Past Trends & Outlook 6. Profile of key players In Bearing Industry SKF India Limited SCHAEFFLER Bearings India Limited Timken India Limited In Forgings Industry Bharat Forge Limited MM Forgings Limited Ramkrishna Forgings Limited ICRA LIMITED P a g e 2

3 Definitions & Abbreviation Term 2W 3W ABC CV FAG GoI GST JTEKT JV LCV M&HCV NBC NEI NRB NTN OEM OI OPBIDTA OPM PV R&D RM RoCE RoNW Schaeffler SKF Timken US Description Two-Wheelers, like motor-cycles, scooters Three-Wheelers including both passenger & goods carrier ABC Bearing Limited, an Indian bearing manufacturer recently acquired by Timken India Limited Commercial Vehicle FAG Bearings India Limited, a subsidiary of Germany based Schaeffler group; FAG Bearings India Limited is renamed as Schaeffler India Limited Government of India Goods and Service Tax JTEKT Corporation, Japan Joint Venture Light Commercial Vehicle (less than 7.5T gross vehicle weight) Medium & Heavy Commercial Vehicles (above 7.5T gross vehicle weight) Brand name used by National Engineering Industries for its bearings/products National Engineering Industries A CK Birla group company NRB Limited India s largest needle roller bearing manufacturer NTN Corporation, Japan Original Equipment Manufacturer Operating income indicating net sales excluding non operating income like interest income, dividends and others Operating profit before interest, depreciation, tax and amortization Operating margin i.e. OPBIDTA/net sales Passenger vehicle like cars, utility vehicle and vans Research and development Raw material Return on capital employed Return on net worth, also commonly referred as return on equity (RoE) Scaheffler AG, a Germany based bearing and transmission component manufacturer AB SKF, a Sweden based global leader in bearing manufacturing; SKF India Limited is listed on Indian bourses and it is subsidiary of AB SKF The Timken Company, a US based bearings manufacturer; Timken India Limited is listed on Indian bourses and it is subsidiary of The Timken Company United State of America (USA) ICRA LIMITED P a g e 3

4 INDIAN BEARINGS INDUSTRY August 2017 Overview SKF is largest bearings manufacturer globally a well as in Indian market Bearings are mechanical devices employed to reduce friction between rotating equipment. Global bearings market is dominated by multinational companies like AB SKF, Schaeffler AG, The Timken Company and Japanese companies like NSK Limited, NTN Corporation and JTEKT Corporation. SKF is the global market leader in ball bearings which along with five other players (Schaeffler, Timken, NSK, NTN and JTEKT) accounts for bulk of global bearings sales. Global bearings market has remained fairly flattish (marginal decline) in past few year though demand prospects are likely to recovery in medium to long term, with China and India leading the pack. Indian bearings market is fairly consolidated, with top 5 players accounting about three fourth of market Unlike global market, automotive bearings accounts for sizeable chunk of Indian bearings market Indian bearing market is estimated at Rs 95 billion and it constitutes less than 5% of global bearing demand. In terms of consumption, about 60% requirement is catered through domestic production while remaining is met through imports. Indian market is dominated by international majors as well as indigenous players like NEI, NRB, ABC and others. Recently, Timken India has announced merger of ABC Bearings, which will result in some consolidation in Indian bearings market. While there are large numbers of players present in the industry, the competitive intensity is moderate as top 5 players constitute ~75% of market share. Domestic bearing industry is also facing heat from counterfeit market, primarily imports from China, which roughly accounts for 10% of domestic market in terms of revenue. In terms of demand dynamics, OEMs constitute 60% of demand whereas rest is driven by aftermarket and exports. Industrial segment constitute ~52% of domestic bearing demand which is largely driven by general machines/motors, electrical equipments (fans/appliances) as well as heavy industries. Increasing automation in manufacturing units, thrust by Government s Make in India program, spending towards railways and metros will support growth of manufacturing and engineering sector, which augurs well for bearing industry. In line with global market, domestic market can be broadly classified under industrial and automotive segments. However, share of automotive segment at 48% is relatively higher than that at global level (~37%). This is mainly on account of higher level of automation in developed countries (resulting in higher industrial activity) and large two wheeler population in India. Usage of bearings is fairly diversified in automotive (PV, CV, 2W, 3W, tractor) as well industrial segments. Also, Indian bearing manufacturers derives sizeable share of their revenue from exports as well as aftermarket business which lends stability to the business as well as mitigates impact of cyclicality in any particular segment. ICRA LIMITED P a g e 4

5 Overview Technology as well as capital intensity acts as entry barrier for new entrants Indian bearing manufacturers increasing spending on R&D to compete with international majors Bearing industry is technologically as well as capital intensive industry, as end products finds application in critical applications like aviation, automobile engines, railways and others. Consequently, all major players in India have product backup with their parent (SKF, SCHAEFFLER, Timken) or with a foreign collaborator. Technology collaboration with reputed OEMs lends credibility to bearing manufacturers and acceptability to their products given similar level of quality control are followed in Indian unit as their counterparts/collaborators in overseas units. Players like NRB and NEI, who earlier had technical JV but are now on their own are spending on R&D to sustain their market position in Indian market. In fact, NEI is one of the select entities in global bearings industry to have received Deming Grand prize for quality. Given technology intensive nature of the industry especially in terms of precision and advanced bearings, the current structure of the industry ensures the existing top players would continue to lead the sector. Exports account for sizeable chunk of Indian bearing manufacturers Timken making India as global hub for bearings supplies; exports account for sizeable share in revenue pie of NEI and NRB In order to capitalize on India s low cost labour advantage, global MNCs have also started using Indian unit as their global souring partners. In general, employee expense constitutes ~10% of sales in India as compared to ~25%-30% in developed countries, which lends cost advantage for MNC to setup unit in India, if volume of certain SKUs justifies investments. Amongst top 5 OEMs, Timken India derives 29% of its revenue from exports followed by NRB and NEI (at ~20%). Indian operations have emerged as export hub for Timken globally and other Indian players like NRB and National Engineering Industries (under NEI Bearing brand) has also made niche presence in global market with reputed customers like Daimler, Volkswagen Group and others. Exports growth has supported overall revenue growth for these entities, given sluggish demand in domestic market over last few years especially, on account of deferment in investment activity which has adversely affected industrial segment. ICRA LIMITED P a g e 5

6 Overview Despite volatility in steel prices, operating margin of bearing manufacturers has been fairly stable Indian bearings manufacturer to witness revenue growth of 9%- 10% over next three fiscals In general, raw material accounts for around 60-62% of bearing manufacturer s revenue. Bearings are mainly manufactured using high grade steel or alloy steel, which exposes them to global steel price movement. Nevertheless, these manufacturers have relatively better pricing power as compared to other commoditized components suppliers, which also gets reflected from fairly stable operating margin performance in the recent time. Steel is major raw material for bearings manufacturers. Bearing manufacturers have relatively strong pricing flexibility owing to technology knowhow and strong aftermarket presence. This is also evident from fairly stable EBIDTA margin around 13%-14% despite underlying headwinds in steel prices as well as moderation in demand. At present, ICRA estimates that domestic bearing components supplier has market potential of Rs billion, as rest of the demand is catered by finished goods imports. Out of the bearing component requirement, bearing ring market is estimated at ~Rs 17 billion which is largely fragmented leading to high competitive intensity. Rings can be manufactured using tubes, cold-drawing of steel bars or by forging process. Amongst these three processes, forged rings are mainly used in critical applications where load/stress is relatively high. Amongst various types of bearings rings, forged bearing rings market is estimated at about 50% of overall bearing rings market. Outlook for domestic bearings market: During FY2009-FY2012, domestic bearings manufacturers witnessed revenue growth of 17.4% in the backdrop of strong uptick in investment activity as well as robust growth in automotive sector. Subsequent slowdown in economic activity and moderation in automotive growth resulted in CAGR growth of just 4.3% during FY2012-FY2017 period. With expected improvement in industrial activity as well as healthy growth prospects for automotive segment, especially 2W, PV and tractor industry; ICRA expects domestic bearing manufactures to witness revenue growth of 9%-10% during FY2017-FY2020 period. Uptick in exports could provide further upside to our growth estimate. The growth will be also supported by stable replacement demand, which provides comfort during slowdown in core industries. Currently, about 40% of domestic bearing requirement is catered through imports as volume in India for certain SKUs are economically viable for bearing manufacturers to setup dedicated lines. With improved off-take, bearings will get increasingly localized which will help bearing component suppliers in the medium to long term. Hence, the demand for domestic bearing components (rollers, rings) is expected to grow at faster rate than that of underlying bearing industry. ICRA LIMITED P a g e 6

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