INVESTMENT MANAGEMENT IN SKF INDUSTRY

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Investment rationale


Strong Presence

SKF Bearings has strong presence in the Indian bearing industry, commanding highest share of 12.3% in total 23mn industry. It serves to almost each and every segment of the industry.


Automobile industry accounts for 35% of its total revenue. SKFs strong presence coupled with growth in automobile industry is likely to improve company’s growth.


Innovative Product Launch

Company is planning to launch a series of new products in the Indian replacement market, which accounts for 40% of total market. The company has successfully launched a new wheel-bearing kit for Maruti 800.In order to further increase it presence in the same segment, it is planning to introduce similar kits for Sumo Model.


Simultaneously, it plans to offer imported wheel bearing kits, clutch release bearing kits, timing belt kits and other products from its groups overseas plant in Indian market. This move will prove instrumental in increasing its revenue share in the market for automobile spare parts.


Debt Re-Structuring
In order to retire high cost debt instruments, SKF Bearing made right issue in the FY01.This move resulted in significant reduction of interest burden. The debt/equity ratio for the company has decreased from 2.1:1 in 1999 to 0.5:1 in 2002, which is likely to reduce further.


Secured redeemable non convertible debentures of Rs200mn were due to retire in August 2003.Capital restructuring resulting in reduction of interest cost burden is likely to improve the company’s profitability.


Valuation
At the current price of Rs87, the stock is trading at P/E of 15x FY03E earnings of Rs5.7. We expect the company to exhibit better results, on account of its strong presence and implementation of growth strategies.



Current Financial Analysis
SKF Bearings has for the first time crossed the Rs4bn.The top line grew by 13.5% to Rs4.1mn,as against RS3.5bn in 2001.The net profits of the company has shown a remarkable growth of 128%. Net profits for the 2002 stood at Rs204.2mn against net profit of Rs89.2mn in 2001.


Working capital of the company have significantly improved and huge focus is given on receivable front. The company increased its production capacity by 17% in 2002 (62mn Nos.) as compared to 2001 (53mn Nos.). EPS for 2002 stood at Rs4.5 against EPS of Rs2 in 2001. Sales for the H1 F12/03 stood at Rs2171mn as against Rs1995mn in H1 F12/02, an increase of 9%. Net profit after tax for the same period was at Rs112mn against Rs59.7mn for the corresponding period of 2002,a significant increase of 88%.


The robust increase in the net profit recorded for H1 F12/03, is the result of increased volumes in the automotive and industrial sectors, as well as savings from the debt restructuring undertaken earlier. Net interest payments for H1 F12/03 stood at Rs17mn, down 48 % from Rs32.8mn in H1F12/02.
 
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