Stock Market Update on FAG Bearings for 2QCY2011 with a Neutral recommendation
For 2QCY2011, FAG Bearings’ (FAG) results were in-line with our expectations on the top-line front and ahead on the net profit front, led by better-than-expected operating margin. Bottom-line growth was also supported by a substantial increase in other income. We revise our earnings estimates upwards to factor in better-than-expected quarterly results. We believe the recent run-up in the stock price factors in the expected earnings growth and, considering the rich valuations, we maintain our Neutral view on the stock.
Strong operating performance: FAG registered strong 17.1% yoy (3.1% qoq) net sales growth to `319.3cr, in-line with our expectation of `324.4cr. Revenue performance was largely in-line with the automotive industry’s growth. EBITDA margin improved by healthy 120bp yoy (down marginally by 13bp qoq) to 20.3% vs. our estimate of 19.5%. This was primarily due to a ~370bp decline in costs related to purchase of traded goods at 24.7% against 28.3% of sales. As a result, operating profit jumped by 24.5% yoy (2.3% qoq) to `64.9cr. Net profit posted a strong 32.2% yoy (4.3% qoq) increase to `44.7cr. Further, a substantial jump in other income (up 77.2% yoy) helped FAG report strong earnings growth.
Outlook and valuation: We believe healthy demand in the auto and industrial segments will aid FAG in registering a CAGR of ~16% in net sales and ~20% in net profit over CY2010–12E. At `1,344, the stock is trading at 13.7x and 12.6x CY2011E and CY2012E earnings, respectively. We believe the recent run-up in the stock price factors in the expected earnings growth and, considering the rich valuations, we maintain our Neutral view on the stock.
