(December 29, 2010)
Second largest player with ~15% market-share: FAG Bearings (FAG) is a member of Germany-based Schaeffler Group, a global leader in the rolling element bearing segment and one of the most prominent players in the industry. FAG is the second largest player in the Indian bearing industry with an overall market share of ~15% and a market leader in the spherical roller bearing segment with a market share of ~55%. We believe robust demand in the auto and industrial segments will aid FAG in registering CAGR of ~17% in net sales and ~25% in net profit over CY2009-12E.
Industry outlook encouraging: We expect a substantial uptick in the industrial segment in the next three-four quarters, driven by higher demand from capital goods companies. The auto segment is also expected to grow, led by a ~12.3% CAGR in auto sector volumes over FY2010-12E. FAG has a strong customer base, including Maruti, M&M, Tata Motors, GM, Ford and Daimler Chrysler, in this segment.
Strong fundamentals and attractive valuation: FAG's net asset turnover remains high (over ~6x in CY2010E) due to largely depreciated assets. The company's strong business model enables it to record robust and consistent RoCE of 30-33%. Cash flow generation is also expected to remain healthy. On the valuation front, the stock is attractively priced at 9.4x CY2012E EPS vs. peer average of 12x CY2012E EPS. We maintain Buy on the stock with a Target Price of Rs.1,035, valuing the stock at 12x CY2012E earnings.
Key risks to our call include: 1) Lower demand and a substantial increase in steel prices, which can exert pressure on margins, 2) adverse currency movement, which can impact FAG's trading business and 3) cheap imports from China.
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