FAG Bearings-Hameed18aug2k5

Market Buzz:
(May not be useful for day-traders.)
FAG Bearings-German Excellence
CMP Rs 256.45 BUY (Not applicable for day-traders.)
Shares o/s: 16.6 mn; Market Cap: Rs 410 crore
EPS e Calendar 2005: Rs 22
Target PE: 15;
Owned to the extent of 51.3 per cent by FAG Germany, FAG Bearings has concluded a solid first half performance. With Revenues placed at Rs 185 crore, and after tax profits of Rs 18.6 crore, the corporate seems to have rapidly outperformed calendar 2004's blockbuster performance. Investors may recall that FAG reported Revenues of Rs 327 for December ending 2004, with after tax profits of Rs 30.8 crore. Quite clearly, for the year ending December 2005 Revenues will close in to the Rs 400 crore, with after tax profits nearly Rs 38 crore.
Besides the financial performance there could be short term price triggers in this counter, if the parent either tries to increase its stake through the creeping acquisition route or shows greater involvement of the Indian operations into the global profile of FAG, Germany.
Stock has a concenterated ownership
In addition to FAG Germany's 51.33 per cent stake, Templeton owns 9.84 per cent, UTI MF owns 1.55 per cent and New India Assurance owns 3.2 per cent. In all FI's own 18 per cent of FAG, with private corporate bodies holding another 11 per cent. A single Delhi based PCB owns close to 1.6 mn shares of FAG, which leaves a small public float.
Q2 numbers were strong
Continued growth in auto sector, increased thrust on replacement markets and ongoing momentum in industrial segments largely contributed to Revnues of Rs 95 crore for Q2, calendar 2005. After tax profits were even stronger at Rs 9.8 crore. FAG's initiatives to increases prices in replacement markets along with benefits from improved productivity and savings from value engineering, collectively contributed towards higher margins. Going forward, with firm steel prices (72% of material costs), we believe margins will remain under pressure.
Efficient working capital management and exchange gain further contributed towards its performance.
Outlook
Going forward, with auto sector (53% of revenues) in growth phase, improved supplies to Railways and its efforts to increase presence in after market, we expect overall revenues to grow by 15 per cent in CY2005.
FAG's efforts to consistently enhance capacities through de-bottlenecking and value engineering along with initiatives to debond its EOU facility will help it take advantage of growth across the segments. Its large-scale capacity expansion will be based on FAG's global expansion plans, which are being crystallized.
Leveraging on its parents technology and product development skills, FAG is aggressively working on strengthening its product range to stay ahead of competition. It has increased presence in after-market with contribution from this segment increasing from the 32 per cent levels in 2003 to 42 per cent of revenues in 2004. Going forth this segment may turn out to be the growth area going forward.
Exports (11.5% of revenues) grew by 12% YoY in 2004. While the parent is still in the process of crystallizing its global expansion plans, with outsourcing becoming a global trend, the potential of FAG exploring opportunities in India are high. If this development materializes, exports will gain significant momentum going forward.
Leveraging on its parents strong product range, FAG has increased sales of imported bearings (18% of revenues), which has widened its customer base and product basket.
Given its strength in technology, ability to leverage on parent for a wide product range and efforts to enhance presence in replacement markets, the outlook going into second half 2005 is strong. Although margin pressure remains a concern, any news flow on parent expansion plans and scaling up outsourcing from India will be an additional growth trigger.