Prabhudas Downgrades FAG Bearing

Prabhudas Lilladher has downgraded its rating on FAG Bearing to ‘outperformer’ from ‘buy’, and set a target price of Rs 676 (10x CY09 earnings) over the next one year, an upside of 28 per cent from the current level. FAG Bearings’ October-December 2007 results were below Prabhudas’ expectation. Net sales grew by 13.5 per cent year on year from Rs 148 crore to Rs 168 crore, mainly due to slowdown in auto and industrial sectors. There was a sharp drop in two-wheeler and commercial vehicle sales during the quarter, which has resulted in a lower sales growth.

FAG Bearing derives 30 per cent of its revenue from auto segment (only cars) and 50 per cent from industrial segment (commercial vehicles, two- and three-wheelers and industrial applications) and balance 15 per cent from the replacement market and trading. The company’s EBIDTA margin declined by 760 basis points from 23.1 per cent to 15.5 per cent year on year due to increase in material cost and other expenses. Material cost increased by 360 basis points from 51.5 per cent to 55.1 per cent due to rise in prices of steel and components.

Other expenses increased by 330 basis points from 17.9 per cent to 21.2 per cent of net sales due to lower sales growth. FAG Bearing’s net profit dropped by 32 per cent year on year from Rs 21.4 crore to Rs 14.5 crore due to lower margins and higher tax rate.

FAG Bearing undertook Rs 350 crore expansion for needle bearings. The same is likely to go on stream in the current year and would contribute substantially from 2009. Prabhudas expects the company to report 21 per cent CAGR in net sales and 19 per cent CAGR in net profit over CY07-09. The brokerage also expects its EBIDTA margin to decline from 20.4 per cent in 2007 to 19.3 per cent in 2009 due to expected increase in material cost.

Prabhudas has downgraded the EPS estimates for 2008 by 25 per cent from Rs 70.9 to Rs 53 and 2009 by 24 per cent from Rs 88.6 to Rs 67.6. At the market price of Rs 527, the stock trades at 9.9x CY08E EPS of Rs 53 and 7.8x CY09E EPS of Rs 67.6.

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