NRB Drives Global Ambitions

NRB Bearings is one the leading bearing manufactures in India and is a market leader in needle roller bearings and cylindrical roller bearings. The company is currently trading at a discount to its larger peers in the industry. Given its aggressive growth plans, including a foray into overseas markets, the stock looks under-valued and offers a good investment opportunity over the next 12-18 months.

In the past three years, NRB’s net sales and net profit have witnessed a compounded annual growth rate (CAGR) of 20% and 25%, respectively. Going forward, we expect it to grow at a faster pace, driven by exports, contribution from its South-East Asian venture and capital expenditure (capex) in India. The company will also gain from a turnaround in the fortunes of its subsidiary, SNL Bearings. The domestic bearings market is worth Rs 3,000 crore and is growing at around 10% year-on-year. However, players in the organised sector grow faster by raising their market share and launching newer products.

Business
NRB Bearings has a 12% market share in the overall organised sector. In the past, its expansion plans suffered due to a power struggle between its Indian promoters and the company’s foreign partner, Timken. With the Indian promoter acquiring Timken’s 26% equity in the company, the management now has greater operational flexibility and unhindered access to the global market.

Having secured its position in the domestic market, the company has set its sight on emerging as a leading bearings manufacturer, with a globally dispersed manufacturing base. Currently, three companies — SKF, FAG and Timken — dominate the global bearings industry.

This gives the trio a huge bargaining power in price negotiations with global auto majors, which are the biggest consumers of bearings and other frictioncontrol products. NRB plans to break into this market by offering similar products at 15-20% lower prices. The company has initiated negotiations with a clutch of global auto majors. Exports currently account for around 8% of its net sales, with Renault (France) and Nachi (Spain) being its key foreign customers.

Capex Plans
As part of the strategy, the company has chalked out aggressive investment plans in India, besides a foray into South-East Asia. It is setting up a greenfield unit in Thailand at a cost of Rs 20 crore. Scheduled to be commissioned by the year-end, the unit will service the requirements of Japanese original equipment manufacturer (OEM) bases there, besides supplying to TVS Motor and Bajaj Auto plants in Indonesia. In the domestic market, the company has completed the first phase of its Rs 100-crore capex plans. Postexpansion, its cylinder roller bearings capacity has tripled to 4.5 million units, while that of needle roller bearings and needle bushes has doubled. The two products account for around 80% of the company revenues.

Gains from capex will begin to accrue from the first quarter itself. At a capital-output ratio of 1:1.25, the capex is estimated to add Rs 125 crore to the company’s topline and around Rs 15 crore to its bottomline on a recurring basis every year. The Thai unit is expected to clock a turnover of around Rs 40 crore when fully operational.

The expansion plans are being funded through a mix of debt and internal accruals. Recently, the company raised $10 million through external commercial borrowings (ECBs). Going forward, NRB plans to invest around Rs 40 crore a year on a recurring basis, financed by its internal accruals. In FY07, the company generated a cash profit of around Rs 56 crore. NRB has also initiated plans to emerge as a full service provider (of friction management solutions) along the lines of global peers. The company has allocated 2% of its net sales to research & development (R&D) and is now working with Indian OEMs such as Tata Motors, Maruti Udyog, Bajaj Auto and Hero Honda in their new product development programme.

Financials
During the quarter ended March this year, the company’s net profit grew by 42% year-on-year to Rs 11.5 crore, while net sales rose 23% to Rs 84.5 crore. This was on account of a slower growth in raw material expenses and staff cost, which lead to 88 basis points improvement in the operating margin to 24.2% of net sales during Q4. During the 12-months ended March ’07, net profit rose 17% to Rs 40 crore while net sales were up 19% to Rs 303 crore. Rising steel prices, and higher interest payments, led to a decline in net profit margin. The company is expected to maintain the margins at the current level due to stable steel prices, larger volumes and various cost-cutting exercises.

Valuations
At the current market price of Rs 95, the stock is trading at around nine times its FY08 estimated earnings per share of Rs 10.5. This is significantly lower than the valuations enjoyed by its two bigger peers — FAG Bearings India and SKF India. While arriving at NRB’s forward P/E, we have assumed a revenue growth of around 25% and no significant change in its operating margins during the current fiscal.

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