The Hindu Business Line : SKF India: Buy

REFLECTIVE of the buoyancy in the business environment, SKF India has reported improved performance for the quarter-ended June 2005. Helped by robust demand from the automotive and industrial market segments, the company reported a 28 per cent growth in turnover and an impressive 60 per cent growth in earnings for this period.

Being the market leader in the bearings industry, SKF India appears to have benefited from the growing demand from both the automobile and industrial market segments. The company derives about 65 per cent of the revenues from the automobile market and about 60 per cent from the original equipment segment. The strong presence in both the original equipment and replacement market has helped the company post a steady growth in performance in the recent quarters. For the quarter-ended June 2005, the turnover rose about 28 per cent to Rs 177.7 crore. Despite the firm trend in price of key inputs, steel in particular, the company has managed to record improved profitability.

The restructuring exercise undertaken over the past few years, along with the improvement in realisations, played a key role in protecting profit margin. The efforts to broad base the client and product base along with the thrust towards value-added products and services appears to have paid-off.

The soft interest rate regime and the cash flow accruing from the conversion of outstanding warrants have also helped the company. SKF India earned net interest income of Rs 1 crore as opposed to an outgo of Rs 0.5 crore in the same period last year. Consequent to the conversion of the warrants, the equity base has increased to Rs 52.7 crore from Rs 45.3 crore.

A combination of improved profitability, growth in volume and savings in interest costs helped SKF India record a 60 per cent rise in post-tax earnings to Rs 19.6 crore. The growth in earnings was stunted by the 54 per cent rise in taxation provision.

Taking into account the growth prospects for the automobile sector and the increase in industrial production, the demand for bearings is likely to be robust in the future. SKF appears well-positioned to tap the growth potential. The contribution from exports has also been growing steadily in the recent years.

That the company may also be used as a sourcing hub by its foreign parent, AB SKF of Sweden, is a positive factor. Export growth over the past few years is a pointer towards this end. To cater to the growing demand, SKF India is expanding capacity of its Bangalore and Pune plants at an estimated cost of Rs 130 crore.

Taking into account these factors, the growth prospects for SKF India is quite encouraging. The profitability could, however, be affected if the price of steel were to move up from prevailing levels. As demonstrated in the recent quarters, the company appears to be in a position to hike product prices in the event of a sustained rise in input cost.

The recent growth in automobile production would also translate into higher demand for bearings from the replacement market in the future. Considering that margins are relatively higher in the replacement market, there is a case for improvement in company's performance in the forthcoming quarters.

At 17 times the earnings for the year-ended December 2004, the stock may appear relatively stiffly priced at Rs 210. The growth prospects, technological backing of global bearings major and rising export contribution justify inclusion of SKF India in the portfolio. The `buy' recommendation is on the assumption that the growth in the automobile production and increased industrial activity would be sustained in the future. Any signs of slowdown in either of these segments would warrant dilution of holdings.

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