The Hindu Business Line : SKF Bearings: Buy

THE sustained improvement in automobile production since the second half of the previous fiscal has had a positive impact on the performance of quite a few companies.

Bearings producer, SKF Bearings, is once such company that has benefited from the pick-up in auto output.

Considering that the growth in commercial vehicle and two-wheeler output continues to remain robust, SKF Bearings' performance is set to improve.

The company has also already initiated restructuring exercise, which has resulted in an overall reduction in staff cost and improvement in working capital cycle. Long-term investors could contemplate equity exposure in the company at the current market price of Rs 41. SKF Bearings is among the major bearings manufacturing company in the country. It has technical-cum-financial collaboration with the global major, AB SKF of Sweden.

The company has a strong presence in the automobile sector and a reasonable strong presence in other segments such as engineering and electrical equipments.

Roughly about 60 per cent of the company's revenues flow from the original equipment segment and the rest from the replacement market.

With a major exposure to the automobile industry, the company's financial performance tends to fluctuate in sync with automobile production.

The slowdown in automobile production for major part of 2001 affected the performance of SKF for the year ended December 2001.

The turnover dropped marginally to Rs 357.3 crore while net profit increased 31 per cent to Rs 8.97 crore. On the equity base of Rs 45.26 crore, the per share earnings work out to Rs 1.98.

The company performance would appear more impressive if viewed in the backdrop of a decline in auto production in 2001.

Despite the drop in commercial vehicle and tractor production, the company managed to remain in healthy terrain with minimal damage primarily on account of the launch of hub units for passenger car market.

Including Maruti, the company is a major supplier of these units to almost all top passenger car producers in the country.

Besides, the initiation of voluntary retirement scheme, coupled with the thrust on cost-reduction, especially in the working capital management front, has helped the company tide over unfavourable business environment.

The pick-up in automobile production since September 2001 has had a positive impact on SKF Bearing's performance.

For the nine month period ended September 2002, the turnover rose 12.88 per cent to Rs 294.32 crore and post-tax earnings 56 per cent to Rs 13.35 crore.

Considering that the commercial vehicle and two-wheeler production continues to remain robust, the company's performance is expected to improve further.

Besides, any improvement in the overall economic fundamentals could spur demand from the more lucrative replacement market.

From an investment perspective, the company's strong fundamental, technical backing of global major and presence across a cross-section of industries are major positive factors.