NRB BEARINGS LTD. Add on dips to. Time Horizon Auto Ancillaries. Rs

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2 Industry CMP Recommendation Add on dips to Sequential Targets Time Horizon Auto Ancillaries Rs 174 BUY at CMP and add on declines Rs Rs 199 & Rs Quarters We had issued Stock Note report on NRB Bearings Ltd. on 8-Jun-17 at the then CMP of Rs 130 and had recommended to BUY at CMP, add on dips to Rs with price targets of Rs 147 and Rs 161. The targets were achieved on 5-Jul-17 and 19-Dec- 17 respectively. Refer NRB Bearings-Stock Note. We now review the developments in the company and provide our updated view on the stock. HDFC Scrip Code NRBBEAEQNR BSE Code NSE Code NRBBEARING Bloomberg NRBBR IN CMP (20-Apr-18) Equity Capital (Rs mn) Face Value (Rs) 2 Eq. Shares O/S (Mn) 96.9 Market Cap (Rs mn) Book Val (H1FY18-Rs) 36.6 Avg.52 Wk Volume 216, Week High Week Low Shareholding Pattern % (Mar-2018) Promoters 53.6 Institutions 33.5 Non Institutions 12.9 Total FUNDAMENTAL ANALYST Atul Karwa atul.karwa@hdfcsec.com Company description Founded in 1965, NRB Bearings (NRB) was the first company to manufacture needle roller bearings in India. For over 40 years, NRB has pioneered the leading edge of bearing technology, and is a recognised leader in needle roller bearings. It is the largest manufacturer of needle roller bearings in India, with ~70% segmental market share. With 65% revenue coming in from domestic OEMs, NRB is expected to be a key beneficiary of robust growth in the automobile sector. Investment rationale Domestic automobile sales continue to remain strong Robust export revenue growth Well-diversified revenue stream Working capital management to strengthen balance sheet Concerns Vulnerable to cyclicality in demand from automobile OEMs Working capital-intensive operations Raw material price volatility Forex risk may impact financial performance View and valuation NRB remains a key beneficiary of the strong volume growth witnessed in the automobile segment across sectors with OEMs accounting for ~65% of revenues. Exports are also growing at a robust pace led by a recovery in the North-American and European truck/pv markets (~20% of revenue). Increasing traction in the after-market segment and incremental revenue from the Defence, Aerospace and Railway segments coupled with fall in interest cost would aid in topline and margin expansion. We feel investors could BUY the stock at CMP and add on declines to Rs band (15.5x FY20E EPS) for sequential targets of Rs 199 (19.5x FY20E EPS) and Rs 214 (21x FY20E EPS) in three to four quarters. At a CMP of Rs 173.9, it is trading at ~17x FY20E EPS. 3 P a g e

3 KEY HIGHLIGHTS NRB group has a market share of ~70% in the needle roller bearings segment and a strong market position in the cylindrical roller bearings segment With 65% revenue coming in from domestic OEMs, NRB is expected to be a key beneficiary of robust growth in the Automobile sector Robust export revenue growth led by a recovery in the North-American and European truck /PV markets. Exports account for ~20% of revenues. Diversified revenue stream with each customer s average contribution to revenue is not more than ~10% Financial Summary Particulars (Rs mn) Q3FY18 Q3FY17 YoY (%) Q2FY18 QoQ (%) FY17 FY18E FY19E FY20E Operating Income 2,078 1, ,082 (0.2) 7,276 8,203 9,170 10,238 EBITDA ,193 1,429 1,634 1,844 Adj. PAT EPS (Rs) P/E (x) EV/EBITDA (x) RoNW (%) Source: (Company, HDFC sec) Company overview Founded in 1965, NRB was the first company to manufacture needle roller bearings in India. For over 40 years, NRB has pioneered the leading edge of bearing technology, and today most of the vehicles on Indian roads run on NRB parts. Since its inception, NRB has grown beyond its signature product to offer a wide range of high-precision friction solutions not only in the automotive sector, but across all mobility applications. NRB has plants Thane, Aurangabad (2), Jalna, Waluj, Hyderabad and Pantnagar. NRB is known for quality and innovative design in high-precision friction solutions. NRB Bearings is a recognised leader in needle roller bearings, conventional cylindrical roller bearings and has developed a new generation of lightweight drawn cup bearings. It has two Government accredited R&D centers that focus on quality engineering and disruptive technologies that will drive future growth. OEM accounts for 65% of FY17 Revenues Sales mix of domestic revenues Focus on managing working capital to reduce leverage and bring down interest costs (Source: Company, HDFC Sec) The NRB group has a market share of ~70% in the needle roller bearings segment and a strong market position in the cylindrical roller bearings segment. The group is a key supplier to prominent automotive OEMs in India. To reduce the impact 4 P a g e

4 of cyclical demand from end users (domestic automotive OEMs), the NRB group has focused on increasing revenue from exports and the replacement market. Revenue from OEMs reduced to ~65% of the group's total revenue in FY17 from 74% in FY11. Despite the large proportion of revenue from OEMs, no single customer accounts for more than 10% of the group's revenue. Installed capacity (Source: Company, HDFC Sec) NRB s product range covers over 5500 different types parts of primarily customized friction solutions. It is one of the three largest suppliers in the world of customized bearings and crank pins to the two and three wheeler industry. For cars and SUVs, it is a significant emerging player in transmission bearings for high end luxury cars and the small car market, globally; its newest products have found a space in the world s most highly engineered dual clutch, automated manual and variable speed transmissions. NRB s largest volume and range of bearings are deep drawn or formed type bearings that are lighter than conventional (solid race) bearings and are often specifically designed for the application. As of FY17, NRB had three subsidiaries viz. SNL Bearings Ltd, NRB Bearings (Thailand) Ltd and NRB Bearings Europe GmbH. SNL Bearings Ltd (SNL), in which NRB holds 73.45% equity, reported PAT of Rs 65.9mn (previous year Rs 56.8mn) on account of higher volumes helped by global decline in commodity prices. Despite the challenging environment in the Indian economy post demonetization and implementation of new BIS-IV emission norms, SNL achieved sales growth of 11.5% from increased sales volumes from existing and new OEM customers. SNL expects to further capitalize on growth opportunities during the current year and enhance profitability with emphasis on improving quality and productivity. NRB Bearings (Thailand) Ltd (NRBT), a wholly owned subsidiary, has increased its sales by 18% to THB 160.6mn (Rs 298.7mn) (previous year THB mn Rs.253.9mn). The share of manufacturing revenues out of total revenues has increased to 5 P a g e

5 72% at THB 115.3mn (Rs 214.4mn) (previous year 70% at THB 95.6mn) and trading revenues are 28% at THB 45.4mn (Rs 84.4mn) (previous year 30% at THB 40.9mn). Consequently, the Company s EBITDA has grown from THB 13.4mn to THB 27.8mn (Rs 51.7mn). The company has made a maiden profit for the year at THB 4.6mn (Rs 8.5mn), mainly due to higher manufacturing volumes and lower exchange losses. New business is being finalized with global Japanese customers and manufacture of new products as well as enhanced production of needle rollers, planned during FY will help in further improving the financial results during the coming years. NRB Bearings Europe GmbH, a wholly owned subsidiary was set up to support increasing exports to Europe. The Company provides marketing and customer support services. The income during the year is 228,739 (Rs 15.8mn) and the resultant profit after tax is 5,914 (Rs 0.4mn). Investment rationale Domestic automobile sales continue to remain strong India s automobile industry just had its best fiscal year with data from manufacturers showing all-time high sales across segments. Cumulative domestic vehicle sales growth in FY18 was ~14%. The two-wheeler, three-wheeler and commercial vehicle segments have each posted record double-digit growth, despite uncertainty over the implementation of GST and transition to new emission standards. The local two-wheeler market is estimated to have crossed the 20-million-unit milestone, with sales growing 14%. The commercial vehicle segment, seen as a barometer of economic activity, is estimated to have recorded sales of over 8.8 lakh units in the past fiscal year, growing 23% from the year before, with medium and heavy vehicles eclipsing the previous peak posted in FY12. Segmentwise Domestic Growth Trend (%) (Source: Industry, HDFC Sec) 6 P a g e

6 With 65% revenue coming in from domestic OEMs, NRB is expected to be a key beneficiary of robust growth in the Automobile sector. NRB has expanded its friction solutions and added new high precision product lines, including the supply of balancer shafts. This is one of the high precision engine components, and puts NRB in a position to expand engine applications in a major way going forward Realisations of CV bearings are 10x of 2 wheeler bearings and 2.5x passenger car bearings. CV sales have been doing well over the last few quarters, this could mean better times for NRB. As of FY17, NRB had 100% dependence on Auto sales unlike other players that are partly dependent on industrial segment (30-55%). NRB commands 12% overall market share in India. Well-diversified revenue stream NRB s client portfolio is well-diversified, and any customer s average contribution to revenue is not more than ~10%. The top 10 clients contribution stands at ~50% of the top-line. With a proven track record of over 50 years, it is the preferred supplier to leading domestic OEMs such as Hero MotoCorp, Bajaj Auto, Maruti Suzuki, Tata Motors and Ashok Leyland, among others. In CV, it now supplies 100% of the needle and cylindrical bearing requirement to Eicher Volvo, the emerging leader. In tractors, apart from supplying entrenched players such as Mahindra and TAFE, NRB is 100% supplier of needle and cylindrical bearings to high growth companies, who are swiftly gaining market share, including Sonalika and John Deere. In passenger cars, it is the most critical suppliers of custom designed bearings at India s largest players, especially in transmission bearings. NRB s foray into Defense has begun successfully with its products being accepted at DRDO and NAL at breakthrough speed. Key clients in Export and Domestic Markets Domestic Market Exports market Ashok Leyland, Tata Motors Daimler Trucks Eicher Volvo Getrag Transmissions Corporation Bajaj Auto, Hero Motocorp GKN Driveline (European automotive and aerospace player) Honda Motorcycle & Scooters Renault Volvo Mahindra and Mahindra Ltd ZF Friedrichshafen AG (global leader providing driveline technology to auto OEMs) Maruti-Suzuki Audi TAFE, John, Deere, Sonalika DRDO, NAL (Source: Company, HDFC Sec) Robust export revenue growth Export revenues are likely to witness robust growth led by a recovery in the North-American and the European truck/pv markets. Exports account for ~20% of revenues. Due to the customised nature of NRB s products clients tend to remain with NRB. Clients have worked with NRB from the conceptualisation stage which enables the company to maintain a close & long term relationship with its clients. 7 P a g e

7 In the first three months of 2018, demand for new cars in the European Union remained slightly positive (+0.7%) despite a decline in March (due to high base effect). Preliminary North American Class 8 orders for March, at 46,300 units, was the third highest month on record, 15% above February and up 103% YoY. Orders for Q were the largest totals of any quarter in history. NRB s focus on expanding in international markets and catering to global players is expected to aid in export revenue. Geographically, apart from the Eurozone, where it has significant penetration, it is now targeting new growth at Japanese, Russian and Korean customers. Export Revenue Growth (Source: Company, HDFC Sec) Working capital management to strengthen balance sheet Management is more focused on efficiently managing the working capital which is expected to yield good results in times ahead. Also the usage of surplus cash (7% of total assets) in repayment of debt is expected to aid in reducing the debt, consequently reducing the finance cost to Rs 107mn in FY20E thus improving the profitability. Net debt/equity ratio is expected to improve from 0.8x in FY17 to 0.4x by FY20E. Falling Interest Costs (Source: Company, HDFC Sec) 8 P a g e

8 Q3FY18 results review NRB posted better-than-expected numbers in Q3FY18, on both the revenue and margin fronts. Revenue came in at Rs 2.08bn (+26% YoY), fuelled by strong growth across OEMs segments (2W, CV and tractor segment) and exports. Product mix was favourable with higher share of Needle bearings and lower share of cylindrical bearings. The company is also looking to procure incremental revenue from the Defence, Marine and Railway segments. EBITDA stood at Rs 405mn (+103% YoY, 6%QoQ). EBITDA margin came in at 19.5% (+740bps YoY, +109 bps QoQ), benefitting from operating leverage and a richer product mix (higher share of Needle bearings). APAT at Rs 212mn (+180% YoY, flat QoQ) Particulars (Rs mn) Q3FY18 Q3FY17 YoY (%) Q2FY18 QoQ (%) Net Sales 2,078 1, ,082 (0.2) Material consumed (10.9) Employee expenses Other expenses EBITDA Depreciation (17) 76 (22.0) EBIT Other Income 8 15 (44) 36 (77.1) Finance cost (23) 36 (5.5) PBT Tax expenses Adj. PAT EPS (Rs) EBITDA (%) bps bps PAT (%) ,085 bps bps (Source: Company, HDFC sec) Concerns Vulnerable to cyclicality in demand from automobile OEMs High dependence of bearing manufacturers on the automobile sector, exposes NRB to cyclicality in demand. In addition, given the capital and technology intensive nature of operations, bearing manufacturers enjoy adequate pricing flexibility with their OEM customers. However, price negotiations happen with a lag, leading to price adjustment delays and consequent impact on profitability in the interim. Working capital-intensive operations Specialised nature of products, and need to maintain stock at stock keeping units (SKUs) for over 500 products for just-intime delivery, leads to high inventory requirement 9 P a g e

9 Raw material price volatility Contracts with OEMs do not have mechanism of raw material price hike pass-through. The companies have to negotiate with OEMs for the same. Raw material costs generally range between 35%-45% of revenue. The major raw material is steel. Forex risk may impact financial performance Exports constitute a significant portion of NRB s business (~20% of revenue in FY17). The company also imports certain raw materials and spares (~23-25% of total requirement). Apart from this the company has Rs ~938mn debt in foreign currency. View and valuation NRB remains a key beneficiary of the strong volume growth witnessed in the automobile segment across sectors with OEMs accounting for ~65% of revenues. Exports are also growing at a robust pace led by a recovery in the North-American and European truck/pv markets (~20% of revenue). Increasing traction in the after-market segment and incremental revenue from the Defence, Aerospace and Railway segments coupled with fall in interest cost would aid in topline and margin expansion. We feel investors could BUY the stock at CMP and add on declines to Rs band (15.5x FY20E EPS) for sequential targets of Rs 199 (19.5x FY20E EPS) and Rs 214 (21x FY20E EPS) in three to four quarters. At a CMP of Rs 173.9, it is trading at ~17x FY20E EPS. 10 P a g e

10 Financial Statements Income Statement Cash Flow Statement Particulars FY16 FY17 FY18E FY19E FY20E Particulars FY16 FY17 FY18E FY19E FY20E Income from operations 6,749 7,276 8,203 9,170 10,238 Profit Before Tax ,048 1,251 1,460 Cost of materials consumed 2,621 2,720 3,186 3,562 3,976 Depreciation Employee Cost 1,284 1,302 1,526 1,687 1,874 Others Other expenses 1,732 2,061 2,063 2,288 2,544 Change in working capital 141 (759) 123 (192) (340) Total expenses 5,638 6,083 6,775 7,537 8,394 Tax expenses (207) (225) (314) (388) (453) EBITDA 1,112 1,193 1,429 1,634 1,844 CF from Operating activities 1, ,316 1,135 1,135 Depreciation Net Capex (192) (326) (505) (505) (505) EBIT ,115 1,297 1,484 Other investing activities - 11 (11) - - Other Income CF from Investing activities (192) (316) (516) (505) (505) Finance Cost Proceeds from Eq Cap Profit Before Tax ,048 1,251 1,460 Borrowings / (Repayments) (488) 275 (400) (300) (300) Tax Expenses Interest paid (185) (169) (146) (127) (107) Minority Interest Dividend paid (281) (172) (205) (254) (296) Adj. PAT CF from Financing activities (845) (65) (751) (680) (703) EPS Net Cash Flow 40 (94) 49 (51) (73) Balance Sheet Financial Ratios Particulars FY16 FY17 FY18E FY19E FY20E Particulars FY16 FY17 FY18E FY19E FY20E EQUITY AND LIABILITIES EPS (Rs) Share Capital Cash EPS (Rs) Reserves and Surplus 2,598 2,977 3,479 4,072 4,763 BVPS (Rs) Shareholders' Funds 2,792 3,171 3,673 4,265 4,957 Minority Interest PE (x) Long Term Debt 618 1, P/BV (x) Short Term Debt 2,058 1,573 1,573 1,423 1,274 EV/EBITDA Total Debt 2,676 2,647 2,497 2,197 1,898 Net Deferred Taxes EBITDAM (%) Long Term Provisions & Others EBITM (%) TOTAL 5,755 6,125 6,425 6,734 7,147 PATM (%) ASSETS ROCE (%) Net Block 2,595 2,470 2,744 2,907 3,047 RONW (%) CWIP P a g e

11 Investments Current Ratio (x) LT Loans & Advances Quick Ratio (x) Total Non-current Assets 3,283 3,266 3,647 3,825 3,985 Debt-Equity (x) Inventories 1,447 1,723 1,753 1,960 2,188 Debtors 2,259 2,212 2,607 2,814 3,170 Debtor days Other Current Assets Inventory days Cash & Equivalents Creditor days Total Current Assets 4,064 4,161 4,637 5,002 5,514 Creditors 899 1, ,074 1,196 Other Current Liabilities & Provns ,019 1,156 Total Current Liabilities 1,592 1,303 1,860 2,093 2,352 Net Current Assets 2,472 2,858 2,778 2,910 3,162 TOTAL 5,755 6,125 6,425 6,734 7,147 (Source: Company, HDFC sec) 1-year Price chart 1-year Forward PE 12 P a g e

12 Fundamental Research Analyst: Atul Karwa HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai Phone: (022) Fax: (022) Website: hdfcsecretailresearch@hdfcsec.com. Compliance Officer: Binkle R. Oza complianceofficer@hdfcsec.com Phone: (022) Disclosure: I, (Atul Karwa, MMS), authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. 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