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B. Krishnakumar

THE sustained increase in automobile output in the first few months of FY 05 and the firm trends in the broad economy, along with the recovery in the economic fundamentals, has rubbed off positively on companies with exposure to the automobile industry. As the market leader in the bearings industry, SKF India has also benefited from this trend.

Aided by the recovery in the tractor industry and the steps taken to move up the value chain, SKF Bearings appears well-placed to record a healthy growth in earnings. Long-term investors may consider inclusion of the company's stock in their portfolio.

The company derives close to 65 per cent of its revenues from the automobile sector and about 60 per cent from the original equipment segment. The recovery in the automobile sector along with the steps taken to restructure the business operations has had a positive impact on the financial performance. The improvement in the industrial sector too has helped SKF report improved earnings.

For the year-ended December 2003, revenues rose 15 per cent to Rs 465.2 crore and post-tax earnings 58 per cent to Rs 32.2 crore. This translates into a per share earnings of Rs 7.1 on a equity base of Rs 45.3 crore. The performance would have been better but for the sharp rise in the price of steel.

The sustained firmness in steel prices is a cause for concern. Besides, the sub-normal monsoon in several parts of the country this year is also worrying. A consequent slowdown in the automobile sector would affect the company's performance.

The thrust towards the development of agriculture and infrastructure sectors could have a positive impact on SKF. Besides, the company has also taken steps to gain access in new markets. It has initiated steps to expand the geographical presence. Besides, the company offers value-added products and services such as hub bearings and the launch of preventive maintenance services, to name a few.

The company is also taking efforts to curtail the presence of unorganised sector players. To broaden the source of earnings, SKF India has entered into strategic tie-ups with other companies. It is also looking at takeover targets to widen its business profile.

As a result of these initiatives, the company's dependence on the automobile sector is likely to get diluted in the future. Also, the profitability is expected to improve. Taking into account the growth prospects and the strong position in the industry, investors may buy the SKF India stock at the current levels. Signs of a slowdown in either automobile production or economic growth would warrant dilution of exposures.

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