Fag Bearings India: Buy

Recommendation: Buy

B. Krishnakumar

THERE is still no evidence of economic activity improving. The decline in index of industrial production is indicative of the depressed situation in the industrial activity.

The only positive factor is the pick-up in offtake of commercial vehicles over the last couple of months. Ashok Leyland recorded a higher sales volume for July while Tata Engineering's sales volume for August increased about 12.5 per cent.

Long-term investors could, however, use such depressed industrial and investment environment to pick up equity exposure in fundamentally sound companies. Bearings producer -- Fag Bearings India -- is one such company that could see a growth in earnings of the recent trend of pick up in automobile sector were to sustain.

Fag Bearings is a subsidiary of the German major - FAG Kulgelfischer Georg Schafer AG. It manufactures ball bearings, cylindrical roller bearings and spherical roller bearings. The company has a major presence in the original equipment (OE) segment of the automobile industry.

In the OE segment, Fag is a major supplier of bearings to Maruti Udyog, Tata Engineering and Bajaj Auto. It has a presence in the export market as well. Exports account for about 20 per cent of the company's revenues. Fag is also taking steps to expand its base in the OE segment while efforts are also on to gain a bigger presence in the replacement market.

Financially, the company's performance has been far better than the average trend in the industry. In contrast to its peers, Fag has managed to log a growth in earnings while its competitors had to contend either with net losses or a decline in the bottomline.

The backing of the overseas partner, coupled with the implementation of restructuring measures played a role in boosting the company's performance. Over the recent years, Fag has undertaken financial restructuring by reorganising its debt structure. It has also implemented a voluntary retirement scheme that resulted in containment of staff cost.

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As a result, for the year ended December 2000, the company reported a 11 per cent growth in turnover to Rs 210.09 crore and a 79 per cent jump in net profit to Rs 12.88 crore. On the equity base of Rs 16.62 crore, the per share earnings work out to Rs 7.7.

From a medium-term perspective, the company's exposure to OE segment is worrying if seen against the ongoing slowdown in the auto sector. However, the efforts taken by the company to gain a better presence in the replacement market would lend some stability to the earnings stream in the future.

Moreover, the recent pick-up in exports is another positive factor for Fag. The commissioning of the export-oriented unit a few years back has helped the company concentrate on the export market. This apart, Fag Bearings India is being considered as a potential sourcing base by the German parent. This is a positive development from the long-term perspective.

As and when the proposal to withdraw excise duty exemption to small scale bearing units is implemented, the business volume for organised sector players would increase. The optimism stems from the fact that the unorganised sector and SSI units have a major presence in the high-volume ball bearing segment of the industry. And, if the automobile recovery gets underway, it would again rub-off positively on the company's earnings stream.

Recently, Fag planned to move into the taper roller bearings market where it does not have a presence. This move again has a positive long-term implication as the company has presence across all key segments of the bearings industry.

Taking into account the recent trend in performance, an attractive dividend yield and positive long-term prospects, investors could consider equity exposure in the company.