Fag Bearings: Buy

Recommendation: Buy

B. Krishnakumar

THERE are early signals of a recovery in the commercial vehicles output in the first half of this fiscal. If the cut in the cash reserve ratio and bank rate manages to trigger an economic recovery, the prospects for the automobile sector could improve further. At this juncture, it would be safer to buy companies having exposure to the automobile sector.

The bearings producer, Fag Bearings India, is likely to benefit from any such recovery in the automobile sector. The company has managed to record improved performance even amidst the recent downturn in the automobile industry. Any recovery in automobile production would only enhance the business prospects of Fag Bearings.

A subsidiary of the German major -- FAG Kulgelfischer Georg Schafer AG. -- the company is a major player in the bearings market. Its product portfolio includes ball bearings, cylindrical and spherical roller bearings.

Fag Bearings has a major exposure to the original equipment (OE) segment of the automobile industry. In the OE segment, the company is a major supplier of bearings to Maruti Udyog, Tata Engineering and Bajaj Auto. The financial performance, therefore, depends on the production trend in the automobile sector.

The company managed to post a strong growth in performance for the year-ended December 2000. The turnover improved 11 per cent to Rs 210.09 crore and the post-tax earnings 79 per cent to Rs 12.88 crore. On the equity base of Rs 16.62 crore, the per share earnings works out to Rs 7.7.

A host of factors have been at play, which has helped Fag Bearings post an improved performance even amidst a subdued trend in the automobile sector. Growing presence in the exports market coupled with the cost-control measures initiated in the recent past, have played a role in boosting Fag Bearing's performance. The implementation of the VRS package during the late 1990s, coupled with a containment of interest cost, have also played a role in the improved performance.

While the recent improvement in the commercial vehicles and steady growth in the two-wheeler production is a positive development, the slowdown in the global auto output is a worrying factor as the company has a significant exposure to the export market. However, the recent slide in the value of the rupee vis-a-vis the dollar is likely to mitigate the impact of the expected slowdown in export volume.

Moreover, the company is also taking steps to enhance its presence in the replacement market, which would lend some stability to the company. With the company being viewed as a potential sourcing base by the German parent, the export earnings could improve in the future.

In a recent development, INA Holdings KG of Germany has decided to acquire a controlling stake in FAG Kulgelfischer Georg Schafer AG of Germany. If the takeover fructifies, it would have long-term positive implications for Fag Bearings India.

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The optimism stems from the fact that INA is also a major player in the global bearings market. Besides, INA has been trying to establish a base in India for some time now. There is also a possibility of INA coming out with an open offer if it manages to succeed in its takeover bid.

However, irrespective of the open offer or the outcome of INA's takeover bid, Fag Bearings India would rank as a portfolio candidate on its own fundamental strengths. Considering the strong fundamentals, growing presence in export market and early signs of recovery in the auto industry, long-term investors could contemplate exposure in the company.

From an investment perspective, strong presence in the automobile market, technical backing of the global major, coupled with the improvement in performance, are positive features. Long-term investors could take exposure in the company. However, a sustained decline in the automobile production would warrant trimming of exposures. On balance, Fag Bearings could turn out to be a relatively high-risk investment option.