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B. Krishnakumar

The company has benefited from the sustained increase in the automobile production.

DESPITE the recent increase in the stock price, long-term investors may consider exposure in SKF India at prevailing price levels. The sustained rise in automobile production along with pick-up in the tractor segment should have positive implications for the company.

Being the market leader in the bearings industry, SKF Bearings has benefited from the sustained increase in the automobile production seen over the last couple of years. The company has a strong presence in the automobile and the industrial bearings market. It derives close to 65 per cent of its turnover from the automobile sector and about 60 per cent of the total revenues from the original equipment segment.

Apart from the recovery in demand, the steps initiated by the company towards controlling costs and expanding the product and clientele base has helped SKF India record steady growth in earnings in the recent quarters.

For the year-ended December 2003, turnover 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 the equity base of Rs 45.3 crore. The company has managed to maintain the growth tempo in this financial year as well. For the quarter-ended September 2004, the urnover rose 26.2 per cent to Rs 146.7 crore and post-tax earnings 70.2 per cent to Rs 15.3 crore.

The growth in performance would appear more impressive, if viewed in the backdrop of a sharp rise in price steel, which is the key raw material for the bearings industry. The robust demand along with the price hikes effected by the company has mitigated the impact of input cost rise.

SKF India appears set to record steady growth in earnings. The automobile production continues to remain robust. After hitting a rough patch, the tractor industry is on a recovery path. This along with the improvement in the industrial sector would continue to drive earnings growth for SKF India.

The company has also taken steps to expand its geographical presence. It has entered into tie-ups with original equipment producers for marketing of bearings in the replacement market. This would help the company gain a better presence in the lucrative replacement market that is now dominated by unorganised sector players.

SKF India is setting up a new global application development centre in Bangalore. This would place the company in a better position to launch products.

The impact of these initiatives would be reflected in the performance over the next few quarters.

The risks to our recommendation are a slowdown in the sustained growth in automobile production and industrial activity. Any signs of slowdown will warrant dilution of exposures.

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