: price: EPS: How does our one year outlook change? We maintain our negative stance on SKF India due to the absence of significant growth momentum drivers over the medium term. While railways could be a strong growth driver, material contribution to revenue is expected to be back-ended. Importantly, SKF India would earn only trading margin on the same as it would be mfg. by SKF Technologies. Within Autos, higher supplies to 4W (3rd gen bearings) would commence from 4QFY17, and is expected to scale up only gradually. We have a TP of Rs. 1,245 based on 20x FY18 EPS of Rs. 62 (at a discount to Timken India s multiple of 25x on the back of lower RoCEs and revenue growth expected to be driven significantly by trading ops) Industrials accounts for ~55% of revenue and while mgmt. indicated revival in certain pockets, demand from major end-markets (steel, mining, textiles, cement, machine tools), remained tepid. Within Industrial, aftermarket (~25% of revenue) remained staid as due to lower utilization levels Within Autos, SKF has higher exposure to 2W and electricals. Going forward, while replacement is expected to remain stable, growth in OEM segment depends on SKF s ability to diversify materially into CV/4W. Major improvement in sales to 4W is expected by 4QFY17, as supplies for 3 rd Gen Bearings to major OEMs begin SKF has significant market share in the passenger railways and has recently commenced supplies w.r.t. orders in the freight division (market size Rs.6bn). However, the impact of the same on accruals would be inhibited as it would be manufactured by SKF Tech. The same has been the case with the wind energy segment, which has seen strong growth. Expect Industrial /auto revenue CAGR of 13%/14% from FY16 - FY18 How does our 3 year Outlook change? Expect import substitution to be a key driver for the bearings industry. However, we believe SKF Technologies (fellow subsidiary) would play an important role in locally manufacturing industrial bearings which are currently imported by SKF India and hence the benefit of locally manufacturing might not entirely flow to SKF India Over a longer term, we expect SKF s product mix to shift away from 2W and electricals segment to 4W and CVs. While in the industrial segment it is expected to move to railways, both of which would increase exposure to Tapered Roller Bearings, where the company has ~25% market share Financial summary Year 1QFY17 Update Promoters 53.6 Institutions 32.5 Public 13.9 Key estimate revision Revenues (Rs. mn) 1m 3m 12m SKF 13% 8% -4% Sensex 3% 7% -2% BSE Auto 4% 10% 9% EBITDA (%) FY17E Adj.PAT (Rs. mn) Adj EPS (Rs.) FY18E Old New Change Old New Change Revenue 25,813 26,409 2.3% 29,251 30,614 4.7% EBITDA 3,485 3,478-0.2% 4,066 4,103 0.9% Margin (%) 13.5% 13.2% -33 bps 13.9% 13.4% -50 bps PAT 2,682 2,721 1.5% 3,176 3,261 2.7% PAT Margin 10.4% 10.3% -10 bps 10.9% 10.7% -25 bps EPS 50.9 51.6 1.4% 60.2 61.8 2.7% All figures in Rs. mn, except EPS, which is in Rs. Bloomberg Shares o/s Market Cap 22 nd July, 2016 SKF IN 53mn Rs. 74bn 52-wk High-Low Rs. 1,484-1,040 3m Avg. Daily Vol Rs. 15mn Index BSE 500 P/E(x) EV/EBITDA (x) CY14 24,090 11.5% 2,766 2,028 38.5 36.2 FY16E 29,923 12.0% 3,583 2,568 48.7 28.6 FY17E 26,409 13.2% 3,478 2,721 51.6 27.0 FY18E 30,614 13.4% 4,103 3,261 61.8 22.5 MUKESH SARAF mukesh@sparkcapital.in +91 44 4344 0041 RAMAKRISHNAN SESHAN rseshan@sparkcapital.in +91 44 4344 0020 Find Spark Research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset Page 1
Jul-13 Sep-13 v-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 v-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 v-15 Jan-16 Mar-16 May-16 SKF India Quarterly Financial Results Standalone financial results Rs. mn\period Jun-16 Jun-15 yoy % Mar-16 qoq Growth Revenue 6,512 6,119 6.4% 5,878 10.8% Raw Material 4,109 3,922 4.8% 3,543 16.0% Employee cost 548 524 4.4% 537 2.0% Other cost 1,019 1,011 0.8% 961 6.0% Total Expenditure 5,676 5,458 4.0% 5,040 12.6% EBITDA 837 662 26.5% 838-0.1% Margin % 12.8% 10.8% 203 bps 14.3% -141 bps Revenue mix (approx) User Segment 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 Auto OEMs 1,650 1,656 1,532 1,662 1,672 % of revenues 27% 28% 25% 29% 26% Auto Aftermarket 825 769 755 831 901 % of revenues 14% 13% 13% 14% 14% Industrial OEM 1,538 1,538 1,565 1,450 1,802 % of revenues 25% 26% 26% 25% 28% Industrial Aftermarket 1,538 1,538 1,745 1,450 1,609 % of revenues 25% 26% 29% 25% 25% Exports 463 414 421 406 451 % Source: of revenues Company, Spark Capital 8% 7% 7% 7% 7% D&A 123 139-11.7% 125-2.1% EBIT 714 523 36.6% 713 0.2% Other income 218 187 17.1% 102 113.8% Net Interest exp (inc) 0 0 NA 0 NA PBT 932 709 31.5% 815 14.4% Tax provision 328 244 34.7% 297 10.7% Tax rate % 35.2% 34.4% 85 bps 36.4% -119 bps PAT (excl. OCI) 604 466 29.8% 518 16.6% PAT Margin % 9.3% 7.6% 167 bps 8.8% 46 bps Shares Outstanding 53 53 53 One year forward P/E band chart 35 12M fwd P/E 30 25 20 15 10 5 0 EPS (Reported, Excl. OCI) 11.5 8.8 29.8% 9.8 16.6% Source: Spark Capital Research 12M fwd P/E Page 2
Financial Summary Abridged Financial Statements 15 Months Key metrics 15 Months Rs. mn CY14 FY16E FY17E FY18E CY14 FY16E FY17E FY18E Profit & Loss Growth ratios Revenues 24,090 29,923 26,409 30,614 Revenues 5.9% -0.4% 9.7% 15.9% Manufacturing & Other Expenses 21,324 26,340 22,931 26,512 EBITDA 5.8% 12.1% 16.3% 18.0% EBITDA 2,766 3,583 3,478 4,103 PAT 12.1% 0.8% 31.8% 19.8% Depreciation 540 684 526 559 Margins EBIT 2,226 2,899 2,954 3,543 EBITDA 11.5% 12.0% 13.2% 13.4% Net Interest Exp / (inc) 0 0 0 0 EBIT 9.2% 9.7% 11.2% 11.6% Profit Before Tax 3,061 3,964 4,165 4,979 PAT 8.4% 8.6% 10.3% 10.7% Tax 1,034 1,396 1,443 1,718 Leverage & WC ratios Adj. Net Profit 2,028 2,568 2,721 3,261 Debt to equity (x) 0.0 0.0 0.0 0.0 Balance Sheet (Rs. mn) Current ratio (x) 2.0 2.1 1.8 1.7 Shareholders Equity 14,162 15,694 17,511 19,716 Debtor days (Sales) 57 64 64 64 Loan funds 0 0 0 0 Inventory days (COGS) 45 52 55 55 Deferred Tax Liability (Net) 1-86 -86-86 Creditor Days (COGS) 52 45 55 60 Sources of Funds 14,163 15,694 17,511 19,716 Performance & turnover ratios Net block 3,666 2,979 3,152 3,243 RoACE 10.9% 12.6% 11.6% 17.5% Capital WIP 184 119 119 119 RoAE 15.1% 17.2% 16.4% 17.5% Current assets, loans & advances 15,262 17,652 20,248 23,558 Total asset turnover (x) 1.2 1.4 1.1 1.1 Current liabilities & provisions 4,949 5,142 6,095 7,290 Fixed asset turnover (x) 2.4 2.9 2.5 2.7 Net Current Assets 10,313 12,510 14,153 16,268 Valuation metrics Application of funds 14,163 15,694 17,511 19,716 Current price (Rs.) 1,393 Cash Flows (Rs. mn) Shares outstanding (mn) 53 53 53 53 Cash flows from operations 2,177 911 3,750 4,003 Market capitalisation (Rs. mn) 73,456 73,456 73,456 73,456 Capex & ICL 471 335 700 650 Enterprise value (Rs. mn) 68,109 66,483 64,386 61,933 Free Cash Flow 1,706 576 3,050 3,353 EV/EBIDTA (x) 24.6 18.6 18.5 15.1 Cash flows from investments (27) (1,738) (700) (650) Adj. Per-share earnings (Rs.) 38.5 48.7 51.6 61.8 Cash flows from financing (925) (159) (953) (900) Price-earnings multiple (x) 36.2 28.6 27.0 22.5 Closing Cash and Cash Equivalents 5,348 6,973 9,071 11,523 Dividend yield (%) 0.7% 1.1% 1.0% 1.2% Page 3
Crystal Ball Gazing CY10-FY16 CAGR % Revenue EBITDA PAT Price 7.0% 5.0% 7.8% 25.8% It is expected that products in new industrial segments would be manufactured at SKF Tech, and would in turn be traded by SKF India, thereby limiting benefits accruing to SKF India from growth in these segments On the other hand, growth in Auto segment led by the Gen3 Bearings for PV and ABS implementation in 2W could be positives for the company Revenue growth to be muted largely back ended during FY16-FY20 Margins could improve led by richer product mix and improved leverage Revenue CAGR of 6% from FY16 to FY20 Expect margin to improve from current levels to ~13.8% levels led by richer product mix and improving leverage Rs. Bn CY10 CY14 FY16 FY17E FY18E FY19E FY20E Revenue 21 24 30 26 31 35 40 CY10 CY14 FY16 FY17E FY18E FY19E FY20E Rs. Bn EBITDA 2.7 2.7 3.6 3.5 4.1 4.7 5.4 EBITDA (%) 13.4% 11.2% 12.1% 13.2% 13.4% 13.5% 13.6% Entry = Rs. 1,215 (20x FY18 EPS) Cumulative Dividends of Rs. 72 TOTAL RETURN OF 29% Expect revenue growth of 7% from FY16-FY20 Expect margin to improve from current levels to ~13.6% levels led by richer product mix and improving leverage Expect multiples sustain existing levels to at Expect trading multiples to sustain at similar levels P/E Multiple FY20 EPS price 20x Rs.86.4 Rs.1,800 Dividend (FY17-20) Rs. 72 Trading History % of times stock traded PE range <12x 12-15x 15-18x 18-21x 21-24x 24-27x >27x 8% 0% 13% 7% 13% 31% 28% Exit = Rs. 1.728 at 20x FY20 P/E Page 4
Spark Disclaimer Rs. SKF India 3 Year Price and History 2,000 1,500 1,000 500 0 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Price Report Date Price Reco. 13/May/16 1,215 1,085 Sell 16/Feb/16 1,150 1,025 Sell 03/v/15 1,260 1,120 Sell 23/Jul/15 1,380 1,400 Add 27/Apr/15 1,386 1,485 Add 24/Feb/15 1,400 1,515 Add 22/Oct/14 1,110 1,240 Add 04/Aug/14 1,195 1,240 Add 29/Apr/14 818 760 Reduce 03/Mar/14 700 740 Add 25/Oct/13 580 625 Add 31/Jul/13 502 570 Add Spark Capital Advisors (India) Private Limited (Spark Capital) and its affiliates are engaged in investment banking, investment advisory and institutional equities and infrastructure advisory services. Spark Capital is registered with SEBI as a Stock Broker and Category 1 Merchant Banker. We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in the last five years. We have not been debarred from doing business by any Stock Exchange/SEBI or any other authorities, nor has our certificate of registration been cancelled by SEBI at any point of time. Absolute Interpretation BUY Stock expected to provide positive returns of >15% over a 1-year horizon ADD Stock expected to provide positive returns of >5% <15% over a 1-year horizon REDUCE Stock expected to provide returns of <5% -10% over a 1-year horizon Stock expected to fall >10% over a 1-year horizon Spark Capital has a subsidiary Spark Investment Advisors (India) Private Limited which is engaged in the services of providing investment advisory services and is registered with SEBI as Investment Advisor. Spark Capital has also an associate company Spark Infra Advisors (India) Private Limited which is engaged in providing infrastructure advisory services. This document does not constitute or form part of any offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. thing in this document should be construed as investment or financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Spark Capital and/or its affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such applicable restrictions. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. Spark Capital makes no representation or warranty, express or implied, as to the accuracy, completeness or fairness of the information and opinions contained in this document. Spark Capital, its affiliates, and the employees of Spark Capital and its affiliates may, from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Page 5
Disclaimer (Cont d) This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through an independent analysis by Spark Capital. While we would endeavour to update the information herein on a reasonable basis, Spark Capital and its affiliates are under no obligation to update the information. Also, there may be regulatory, compliance or other reasons that prevent Spark Capital and its affiliates from doing so. Neither Spark Capital nor its affiliates or their respective directors, employees, agents or representatives shall be responsible or liable in any manner, directly or indirectly, for views or opinions expressed in this report or the contents or any errors or discrepancies herein or for any decisions or actions taken in reliance on the report or the inability to use or access our service in this report or for any loss or damages whether direct or indirect, incidental, special or consequential including without limitation loss of revenue or profits that may arise from or in connection with the use of or reliance on this report. Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, Spark Capital has incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report: Disclosure of Interest Statement Analyst financial interest in the company Group/directors ownership of the subject company covered Investment banking relationship with the company covered Spark Capital s ownership/any other financial interest in the company covered Associates of Spark Capital s ownership more than 1% in the company covered Any other material conflict of interest at the time of publishing the research report Receipt of compensation by Spark Capital or its Associate Companies from the subject company covered for in the last twelve months: Managing/co-managing public offering of securities Investment banking/merchant banking/brokerage services Products or services other than those above In connection with research report Whether Research Analyst has served as an officer, director or employee of the subject company covered Whether the Research Analyst or Research Entity has been engaged in market making activity of the Subject Company; Yes/ Analyst Certification of Independence The views expressed in this research report accurately reflect the analyst s personal views about any and all of the subject securities or issuers; and no part of the research analyst s compensations was, is or will be, directly or indirectly, related to the specific recommendation or views expressed in the report. Additional Disclaimer for US Institutional Investors This research report prepared by Spark Capital Advisors (India) Private Limited is distributed in the United States to US Institutional Investors (as defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) only by Auerbach Grayson, LLC, a broker-dealer registered in the US (registered under Section 15 of Securities Exchange Act of 1934, as amended). Auerbach Grayson accepts responsibility on the research reports and US Institutional Investors wishing to effect transaction in the securities discussed in the research material may do so through Auerbach Grayson. All responsibility for the distribution of this report by Auerbach Grayson, LLC in the US shall be borne by Auerbach Grayson, LLC. All resulting transactions by a US person or entity should be effected through a registered broker-dealer in the US. This report is not directed at you if Spark Capital Advisors (India) Private Limited or Auerbach Grayson, LLC is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that Auerbach Grayson, LLC and Spark Capital Advisors (India) Private Limited are permitted to provide research material concerning investment to you under relevant legislation and regulations. Page 6