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PICK OF THE WEEK
Apr 23, 2018
NRB BEARINGS LTD.
Recommendation
BUY at CMP and add on declines
Add on dips to
Rs 155-160
Sequential Targets
Rs 199 & Rs 214
Time Horizon
3-4 Quarters
Industry
Auto Ancillaries
CMP
Rs 174
FUNDAMENTAL ANALYST
Atul Karwa
HDFC Scrip Code NRBBEAEQNR
BSE Code 530367
NSE Code NRBBEARING
Bloomberg NRBBR IN
CMP (20-Apr-18) 173.9
Equity Capital (Rs mn) 193.8
Face Value (Rs) 2
Eq. Shares O/S (Mn) 96.9
Market Cap (Rs mn) 16851
Book Val (H1FY18-Rs) 36.6
Avg.52 Wk Volume 216,000
52 Week High 182.7
52 Week Low 109.0
Shareholding Pattern % (Mar-2018)
Promoters 53.6
Institutions 33.5
Non Institutions 12.9
Total 100.0
We had issued Stock Note report on NRB Bearings Ltd. on 8-Jun-17 at the then CMP of Rs 130 and had recommended to BUY at CMP, add on dips to Rs 115-119 with price targets of Rs 147 and Rs 161. The targets were achieved on 5-Jul-17 and 19-Dec-17 respectively. Refer NRB Bearings-Stock Note. We now review the developments in the company and provide our updated view on the stock.
Company description Founded in 1965, NRB Bearings (NRB) was the first company to manufacture needle roller bearings in India. For over 40 years, NRB has pioneered the leading edge of bearing technology, and is a recognised leader in needle roller bearings. It is the largest manufacturer of needle roller bearings in India, with ~70% segmental market share. With 65% revenue coming in from domestic OEMs, NRB is expected to be a key beneficiary of robust growth in the automobile sector.
Investment rationale Domestic automobile sales continue to remain strong
Robust export revenue growth
Well-diversified revenue stream
Working capital management to strengthen balance sheet
Concerns Vulnerable to cyclicality in demand from automobile OEMs
Working capital-intensive operations
Raw material price volatility
Forex risk may impact financial performance
View and valuation NRB remains a key beneficiary of the strong volume growth witnessed in the automobile segment across sectors with OEMs accounting for ~65% of revenues. Exports are also growing at a robust pace led by a recovery in the North-American and European truck/PV markets (~20% of revenue). Increasing traction in the after-market segment and incremental revenue from the Defence, Aerospace and Railway segments coupled with fall in interest cost would aid in topline and margin expansion. We feel investors could BUY the stock at CMP and add on declines to Rs 155-160 band (15.5x FY20E EPS) for sequential targets of Rs 199 (19.5x FY20E EPS) and Rs 214 (21x FY20E EPS) in three to four quarters. At a CMP of Rs 173.9, it is trading at ~17x FY20E EPS.
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Apr 23, 2018
NRB BEARINGS LTD.
Financial Summary
Particulars (Rs mn) Q3FY18 Q3FY17 YoY (%) Q2FY18 QoQ (%) FY17 FY18E FY19E FY20E
Operating Income 2,078 1,652 25.8 2,082 (0.2) 7,276 8,203 9,170 10,238
EBITDA 405 200 102.8 383 5.7 1,193 1,429 1,634 1,844
Adj. PAT 212 76 179.4 211 0.3 540 718 846 988
EPS (Rs) 2.2 0.8 179.4 2.2 0.3 5.6 7.4 8.7 10.2
P/E (x) 29.6 22.3 18.9 16.2
EV/EBITDA (x) 15.4 12.7 11.0 9.6
RoNW (%) 18.1 21.0 21.3 21.4 Source: (Company, HDFC sec)
Company overview Founded in 1965, NRB was the first company to manufacture needle roller bearings in India. For over 40 years, NRB has pioneered the leading edge of bearing technology, and today most of the vehicles on Indian roads run on NRB parts. Since its inception, NRB has grown beyond its signature product to offer a wide range of high-precision friction solutions not only in the automotive sector, but across all mobility applications. NRB has plants Thane, Aurangabad (2), Jalna, Waluj, Hyderabad and Pantnagar.
NRB is known for quality and innovative design in high-precision friction solutions. NRB Bearings is a recognised leader in needle roller bearings, conventional cylindrical roller bearings and has developed a new generation of lightweight drawn cup bearings. It has two Government accredited R&D centers that focus on quality engineering and disruptive technologies that will drive future growth.
OEM accounts for 65% of FY17 Revenues Sales mix of domestic revenues
(Source: Company, HDFC Sec)
The NRB group has a market share of ~70% in the needle roller bearings segment and a strong market position in the cylindrical roller bearings segment. The group is a key supplier to prominent automotive OEMs in India. To reduce the impact
KEY HIGHLIGHTS
NRB group has a market share of ~70% in the needle roller bearings segment and a strong market position in the cylindrical roller bearings segment
With 65% revenue coming in from domestic OEMs, NRB is expected to be a key beneficiary of robust growth in the Automobile sector
Robust export revenue growth led by a recovery in the North-American and European truck /PV markets. Exports account for ~20% of revenues.
Diversified revenue stream with each customer’s average contribution to revenue is not more than ~10%
Focus on managing working capital to reduce leverage and bring down interest costs
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PICK OF THE WEEK
Apr 23, 2018
NRB BEARINGS LTD.
of cyclical demand from end users (domestic automotive OEMs), the NRB group has focused on increasing revenue from exports and the replacement market. Revenue from OEMs reduced to ~65% of the group's total revenue in FY17 from 74% in FY11. Despite the large proportion of revenue from OEMs, no single customer accounts for more than 10% of the group's revenue.
Installed capacity
(Source: Company, HDFC Sec)
NRB’s product range covers over 5500 different types parts of primarily customized friction solutions. It is one of the three largest suppliers in the world of customized bearings and crank pins to the two and three wheeler industry. For cars and SUVs, it is a significant emerging player in transmission bearings for high end luxury cars and the small car market, globally; its newest products have found a space in the world’s most highly engineered dual clutch, automated manual and variable speed transmissions. NRB’s largest volume and range of bearings are deep drawn or formed type bearings that are lighter than conventional (solid race) bearings and are often specifically designed for the application.
As of FY17, NRB had three subsidiaries viz. SNL Bearings Ltd, NRB Bearings (Thailand) Ltd and NRB Bearings Europe GmbH. SNL Bearings Ltd (SNL), in which NRB holds 73.45% equity, reported PAT of Rs 65.9mn (previous year Rs 56.8mn) on account of higher volumes helped by global decline in commodity prices. Despite the challenging environment in the Indian economy post demonetization and implementation of new BIS-IV emission norms, SNL achieved sales growth of 11.5% from increased sales volumes from existing and new OEM customers. SNL expects to further capitalize on growth opportunities during the current year and enhance profitability with emphasis on improving quality and productivity. NRB Bearings (Thailand) Ltd (NRBT), a wholly owned subsidiary, has increased its sales by 18% to THB 160.6mn (Rs 298.7mn) (previous year THB 136.52mn – Rs.253.9mn). The share of manufacturing revenues out of total revenues has increased to
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PICK OF THE WEEK
Apr 23, 2018
NRB BEARINGS LTD.
72% at THB 115.3mn (Rs 214.4mn) (previous year 70% at THB 95.6mn) and trading revenues are 28% at THB 45.4mn (Rs 84.4mn) (previous year 30% at THB 40.9mn). Consequently, the Company’s EBITDA has grown from THB 13.4mn to THB 27.8mn (Rs 51.7mn). The company has made a maiden profit for the year at THB 4.6mn (Rs 8.5mn), mainly due to higher manufacturing volumes and lower exchange losses. New business is being finalized with global Japanese customers and manufacture of new products as well as enhanced production of needle rollers, planned during FY 2017-18 will help in further improving the financial results during the coming years. NRB Bearings Europe GmbH, a wholly owned subsidiary was set up to support increasing exports to Europe. The Company provides marketing and customer support services. The income during the year is € 228,739 (Rs 15.8mn) and the resultant profit after tax is € 5,914 (Rs 0.4mn).
Investment rationale Domestic automobile sales continue to remain strong India’s automobile industry just had its best fiscal year with data from manufacturers showing all-time high sales across segments. Cumulative domestic vehicle sales growth in FY18 was ~14%. The two-wheeler, three-wheeler and commercial vehicle segments have each posted record double-digit growth, despite uncertainty over the implementation of GST and transition to new emission standards. The local two-wheeler market is estimated to have crossed the 20-million-unit milestone, with sales growing 14%. The commercial vehicle segment, seen as a barometer of economic activity, is estimated to have recorded sales of over 8.8 lakh units in the past fiscal year, growing 23% from the year before, with medium and heavy vehicles eclipsing the previous peak posted in FY12.
Segmentwise Domestic Growth Trend (%)
(Source: Industry, HDFC Sec)
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PICK OF THE WEEK
Apr 23, 2018
NRB BEARINGS LTD.
With 65% revenue coming in from domestic OEMs, NRB is expected to be a key beneficiary of robust growth in the Automobile sector. NRB has expanded its friction solutions and added new high precision product lines, including the supply of balancer shafts. This is one of the high precision engine components, and puts NRB in a position to expand engine applications in a major way going forward Realisations of CV bearings are 10x of 2 wheeler bearings and 2.5x passenger car bearings. CV sales have been doing well over the last few quarters, this could mean better times for NRB. As of FY17, NRB had 100% dependence on Auto sales unlike other players that are partly dependent on industrial segment (30-55%). NRB commands 12% overall market share in India. Well-diversified revenue stream NRB’s client portfolio is well-diversified, and any customer’s average contribution to revenue is not more than ~10%. The top 10 clients’ contribution stands at ~50% of the top-line. With a proven track record of over 50 years, it is the preferred supplier to leading domestic OEMs such as Hero MotoCorp, Bajaj Auto, Maruti Suzuki, Tata Motors and Ashok Leyland, among others. In CV, it now supplies 100% of the needle and cylindrical bearing requirement to Eicher Volvo, the emerging leader. In tractors, apart from supplying entrenched players such as Mahindra and TAFE, NRB is 100% supplier of needle and cylindrical bearings to high growth companies, who are swiftly gaining market share, including Sonalika and John Deere. In passenger cars, it is the most critical suppliers of custom designed bearings at India’s largest players, especially in transmission bearings. NRB’s foray into Defense has begun successfully with its products being accepted at DRDO and NAL at breakthrough speed.
Key clients in Export and Domestic Markets
Domestic Market Exports market Ashok Leyland, Tata Motors Daimler Trucks Eicher Volvo Getrag Transmissions Corporation
Bajaj Auto, Hero Motocorp GKN Driveline (European automotive and aerospace player)
Honda Motorcycle & Scooters Renault Volvo
Mahindra and Mahindra Ltd ZF Friedrichshafen AG (global leader providing driveline technology to auto OEMs)
Maruti-Suzuki Audi TAFE, John, Deere, Sonalika DRDO, NAL
(Source: Company, HDFC Sec)
Robust export revenue growth Export revenues are likely to witness robust growth led by a recovery in the North-American and the European truck/PV markets. Exports account for ~20% of revenues. Due to the customised nature of NRB’s products clients tend to remain with NRB. Clients have worked with NRB from the conceptualisation stage which enables the company to maintain a close & long term relationship with its clients.
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PICK OF THE WEEK
Apr 23, 2018
NRB BEARINGS LTD.
In the first three months of 2018, demand for new cars in the European Union remained slightly positive (+0.7%) despite a decline in March (due to high base effect). Preliminary North American Class 8 orders for March, at 46,300 units, was the third highest month on record, 15% above February and up 103% YoY. Orders for Q1 2018 were the largest totals of any quarter in history. NRB’s focus on expanding in international markets and catering to global players is expected to aid in export revenue. Geographically, apart from the Eurozone, where it has significant penetration, it is now targeting new growth at Japanese, Russian and Korean customers.
Export Revenue Growth
(Source: Company, HDFC Sec) Working capital management to strengthen balance sheet Management is more focused on efficiently managing the working capital which is expected to yield good results in times ahead. Also the usage of surplus cash (7% of total assets) in repayment of debt is expected to aid in reducing the debt, consequently reducing the finance cost to Rs 107mn in FY20E thus improving the profitability. Net debt/equity ratio is expected to improve from 0.8x in FY17 to 0.4x by FY20E.
Falling Interest Costs
(Source: Company, HDFC Sec)
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Apr 23, 2018
NRB BEARINGS LTD.
Q3FY18 results review NRB posted better-than-expected numbers in Q3FY18, on both the revenue and margin fronts. Revenue came in at Rs 2.08bn (+26% YoY), fuelled by strong growth across OEMs segments (2W, CV and tractor segment) and exports. Product mix was favourable with higher share of Needle bearings and lower share of cylindrical bearings. The company is also looking to procure incremental revenue from the Defence, Marine and Railway segments. EBITDA stood at Rs 405mn (+103% YoY, 6%QoQ). EBITDA margin came in at 19.5% (+740bps YoY, +109 bps QoQ), benefitting from operating leverage and a richer product mix (higher share of Needle bearings). APAT at Rs 212mn (+180% YoY, flat QoQ)
Particulars (Rs mn) Q3FY18 Q3FY17 YoY (%) Q2FY18 QoQ (%)
Net Sales 2,078 1,652 26 2,082 (0.2)
Material consumed 817 648 26 917 (10.9)
Employee expenses 327 313 5 324 1.0
Other expenses 529 492 8 458 15.5
EBITDA 405 200 103 383 5.7
Depreciation 59 71 (17) 76 (22.0)
EBIT 346 129 169 307 12.5
Other Income 8 15 (44) 36 (77.1)
Finance cost 34 45 (23) 36 (5.5)
PBT 320 98 225 307 4.2
Tax expenses 108 22 380 95 12.7
Adj. PAT 212 76 179 211 0.3
EPS (Rs) 2.2 0.8 179 2.2 0.3
EBITDA (%) 19.5 12.1 740 bps 18.4 109 bps
PAT (%) 33.6 22.8 1,085 bps 31.1 254 bps (Source: Company, HDFC sec)
Concerns Vulnerable to cyclicality in demand from automobile OEMs High dependence of bearing manufacturers on the automobile sector, exposes NRB to cyclicality in demand. In addition, given the capital and technology intensive nature of operations, bearing manufacturers enjoy adequate pricing flexibility with their OEM customers. However, price negotiations happen with a lag, leading to price adjustment delays and consequent impact on profitability in the interim. Working capital-intensive operations Specialised nature of products, and need to maintain stock at stock keeping units (SKUs) for over 500 products for just-in-time delivery, leads to high inventory requirement
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Raw material price volatility Contracts with OEMs do not have mechanism of raw material price hike pass-through. The companies have to negotiate with OEMs for the same. Raw material costs generally range between 35%-45% of revenue. The major raw material is steel. Forex risk may impact financial performance Exports constitute a significant portion of NRB’s business (~20% of revenue in FY17). The company also imports certain raw materials and spares (~23-25% of total requirement). Apart from this the company has Rs ~938mn debt in foreign currency.
View and valuation NRB remains a key beneficiary of the strong volume growth witnessed in the automobile segment across sectors with OEMs accounting for ~65% of revenues. Exports are also growing at a robust pace led by a recovery in the North-American and European truck/PV markets (~20% of revenue). Increasing traction in the after-market segment and incremental revenue from the Defence, Aerospace and Railway segments coupled with fall in interest cost would aid in topline and margin expansion. We feel investors could BUY the stock at CMP and add on declines to Rs 155-160 band (15.5x FY20E EPS) for sequential targets of Rs 199 (19.5x FY20E EPS) and Rs 214 (21x FY20E EPS) in three to four quarters. At a CMP of Rs 173.9, it is trading at ~17x FY20E EPS.
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NRB BEARINGS LTD.
Financial Statements
Income Statement Cash Flow Statement Particulars FY16 FY17 FY18E FY19E FY20E Particulars FY16 FY17 FY18E FY19E FY20E
Income from operations 6,749 7,276 8,203 9,170 10,238 Profit Before Tax 639 779 1,048 1,251 1,460
Cost of materials consumed 2,621 2,720 3,186 3,562 3,976 Depreciation 185 169 146 127 107
Employee Cost 1,284 1,302 1,526 1,687 1,874 Others 319 323 314 337 360
Other expenses 1,732 2,061 2,063 2,288 2,544 Change in working capital 141 (759) 123 (192) (340)
Total expenses 5,638 6,083 6,775 7,537 8,394 Tax expenses (207) (225) (314) (388) (453)
EBITDA 1,112 1,193 1,429 1,634 1,844 CF from Operating activities 1,077 287 1,316 1,135 1,135
Depreciation 319 323 314 337 360 Net Capex (192) (326) (505) (505) (505)
EBIT 792 870 1,115 1,297 1,484 Other investing activities - 11 (11) - -
Other Income 32 78 79 81 82 CF from Investing activities (192) (316) (516) (505) (505)
Finance Cost 185 169 146 127 107 Proceeds from Eq Cap - - - - -
Profit Before Tax 639 779 1,048 1,251 1,460 Borrowings / (Repayments) (488) 275 (400) (300) (300)
Tax Expenses 207 225 314 388 453 Interest paid (185) (169) (146) (127) (107)
Minority Interest 12 14 15 17 19 Dividend paid (281) (172) (205) (254) (296)
Adj. PAT 420 540 718 846 988 CF from Financing activities (845) (65) (751) (680) (703)
EPS 4.3 5.6 7.41 8.7 10.2 Net Cash Flow 40 (94) 49 (51) (73)
Balance Sheet Financial Ratios Particulars FY16 FY17 FY18E FY19E FY20E Particulars FY16 FY17 FY18E FY19E FY20E
EQUITY AND LIABILITIES EPS (Rs) 4.3 5.6 7.4 8.7 10.2
Share Capital 194 194 194 194 194 Cash EPS (Rs) 7.6 8.9 10.6 12.2 13.9
Reserves and Surplus 2,598 2,977 3,479 4,072 4,763 BVPS (Rs) 28.8 32.7 37.9 44.0 51.2
Shareholders' Funds 2,792 3,171 3,673 4,265 4,957
Minority Interest 41 55 70 88 107 PE (x) 40.1 31.2 23.5 19.9 17.1
Long Term Debt 618 1,075 925 775 625 P/BV (x) 6.0 5.3 4.6 4.0 3.4
Short Term Debt 2,058 1,573 1,573 1,423 1,274 EV/EBITDA 17.3 16.2 13.4 11.5 10.1
Total Debt 2,676 2,647 2,497 2,197 1,898
Net Deferred Taxes 117 127 127 127 127 EBITDAM (%) 16.5 16.4 17.4 17.8 18.0
Long Term Provisions & Others 129 125 57 57 58 EBITM (%)
TOTAL 5,755 6,125 6,425 6,734 7,147 PATM (%) 6.2 7.4 8.8 9.2 9.6
ASSETS ROCE (%) 9.5 11.1 13.1 14.2 15.3
Net Block 2,595 2,470 2,744 2,907 3,047 RONW (%) 15.7 18.1 21.0 21.3 21.4
CWIP 48 88 93 98 103
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Investments - 11 - - - Current Ratio (x) 2.6 3.2 2.5 2.4 2.3
LT Loans & Advances 640 698 810 820 836 Quick Ratio (x) 1.6 1.9 1.6 1.5 1.4
Total Non-current Assets 3,283 3,266 3,647 3,825 3,985 Debt-Equity (x) 2.6 3.2 2.5 2.4 2.3
Inventories 1,447 1,723 1,753 1,960 2,188
Debtors 2,259 2,212 2,607 2,814 3,170 Debtor days 122.2 111.0 116.0 112.0 113.0
Other Current Assets 37 0 2 4 6 Inventory days 78.3 86.4 78.0 78.0 78.0
Cash & Equivalents 320 226 275 224 150 Creditor days 48.6 52.5 42.9 42.7 42.6
Total Current Assets 4,064 4,161 4,637 5,002 5,514
Creditors 899 1,046 965 1,074 1,196
Other Current Liabilities & Provns 693 258 894 1,019 1,156
Total Current Liabilities 1,592 1,303 1,860 2,093 2,352
Net Current Assets 2,472 2,858 2,778 2,910 3,162
TOTAL 5,755 6,125 6,425 6,734 7,147
(Source: Company, HDFC sec)
1-year Price chart 1-year Forward PE
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Fundamental Research Analyst: Atul Karwa ([email protected])
HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 30 75 3400 Fax: (022) 2496 5066 Website: www.hdfcsec.com Email: [email protected].
Compliance Officer: Binkle R. Oza Email: [email protected] Phone: (022) 3045 3600 __________________________________________________________________________________________________________________________________________________________________________________________________ Disclosure: I, (Atul Karwa, MMS), authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate does not have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. Any holding in stock – No HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475. Disclaimer: This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity who is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject HSL or its affiliates to any registration or licensing requirement within such jurisdiction. If this report is inadvertently send or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. This document may not be reproduced, distributed or published for any purposes without prior written approval of HSL. Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. HSL may from time to time solicit from, or perform broking, or other services for, any company mentioned in this mai l and/or its attachments. HSL and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. HSL, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. HSL and other group companies, its directors, associates, employees may have various positions in any of the stocks, securities and financial instruments dealt in the report, or may make sell or purchase or other deals in these securities from time to time or may deal in other securities of the companies / organizations described in this report.
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