Bearing Manufacturing Companies in India
This probably also acts as an entry barrier to the growth of number of bearing manufacturers in India in the organized segment. Though, there are numerous players in the unorganized segment, however, they primarily cater to the replacement ...
Bearing Manufacturing Companies in India
A few days back we closed a special situationopportunity in NRB Bearings; however while looking at the details of NRB Bearings, we started checking out details of other bearing manufacturers and were positively surprised by the quality of the companies in the bearings segment.
In this article, let’s look at FAG Bearings India, which is the second largest player in the Indian Bearings industry with ~15% market share and ~29% market share in the organized segment. Yes, as can be observed from the market share details, organized and un-organized players account for almost equal share of the Indian bearings industry.
Well, the largest player is SFK India and is again a listed company like FAG, however based on some preliminary research; we found FAG better and would therefore like to share the details on the company. Besides FAG and SKG, Timken India and NRB are two other prominent players in the organized segment.
Note: Please don’t construe this note on FAG Bearings as buy/sell advice. The readers are suggested to carry out their own due diligence.
The total size of the bearings industry in India is estimated at Rs 8,500 crores at the end of Mar’12, of which organized players accounted for Rs 4,500 crores, while the small scale companies and imports accounted for the rest.
FAG Bearings India is the second largest player in the Indian bearings industry with Schaeffler Group, Germany as the promoters of the company with 51.33% stake.
The Schaeffler Group is a privately owned major manufacturer of rolling element bearings for automotive, aerospace and industrial uses. It is a supplier to the automotive industry and one of the world‘s leading manufacturers of rolling bearings and linear products under the brands – INA, FAG and LuK for more than 120 years.
We believe, the association of Schaeffler Group is extremely critical in the success of FAG Bearings India, as all (yes, all) the large and successful players of the Indian Bearings industry are dependent on the technology provided by their foreign collaborators.
This probably also acts as an entry barrier to the growth of number of bearing manufacturers in India in the organized segment. Though, there are numerous players in the unorganized segment, however, they primarily cater to the replacement market and continue to serve the very low-end market as well as form the core of the counterfeit products in the market.
With a renewed focus on quality & reliability and with the quality of bearings manufactured by unorganized players being much inferior, the replacement market is increasingly turning to the organized sector which augurs well for companies like FAG, SKF, etc.
As can be observed from the above illustration, the company’s performance has been very good over the years and consistently delivered return on equity in excess of 20%.
During the last 5 years, both Automotive and capital goods industries (bearings are used in almost all the industries) witnessed good and bad periods, however FAG consistently delivered higher sales (even during FY 09) at the rate of 19% annualized. Similarly, the profits of the company have also grown at the same rate of 19% annualized on the back of consistently improving operating income and interest income on ~200 crore surplus funds with the company.
Yes, FAG Bearings is a debt free company, with surplus funds, as it has been able to consistently generate very good cash flows from operations.
In the very beginning we mentioned that even though SKF is the largest player, on the basis of preliminary research we find FAG Bearings a better company. Well, the various reasons behind the same are as below:
We found a striking difference in the operating margins of the two companies. While FAG has been able to maintain its operating margins in the range of 18-21% (very good), SKF’s operating margins have hovered in the range of 12-13%.
Besides operating margins, considering the rate of increase in depreciation, FAG’s been generating higher sales on its fixed assets.
Well, for the last 2 years FAG’s been running its plants at more than 100% capacity utilization and in order to overcome capacity constraints, during the calendar and financial year 2011 it spent more than 150 crores on expanding its capacities:
The performance of FAG Bearings has been excellent without being very aggressive. Yes, sometimes managements are over ambitious and become aggressive to the extent of jeopardizing the interest of all the stakeholders and therefore from the point of view of minority shareholders, it’s important that people at the helm of affairs are able and conservative at the same time.
The increasing market share of organized players is a very good sign and since unorganized players still account for ~48-50% market share, there’s enough room for companies like FAG Bearings to grow at a good pace and garner a larger pie of the overall bearings industry in India.
The holding company, FAG Group, Germany, is one of the oldest and the leading company in advance bearing technologies. With their support, FAG India should be able to maintain its competitive advantage in technology over its peers.
The long term outlook for bearings industry in India is very good on the back of growth of the Indian middle class which will accelerate demand from the automotive industry and other sectors including steel, power & heavy engineering.
Over the last few years, there have been regular increases in the prices of bearing steel which constitute a major portion of bearing costs. While FAG has been able to pass on the increased cost of raw materials and maintain its operating margins in the range of 19-20%, there’s a certain period of lag before which it is able to re-negotiate prices with its customers. Thus, in case of sharp increase in cost of raw materials or a sudden drop in demand (refer FY 09), the margins can go for a toss in a particular year.
Considering the operating performance of the company, efficient capital allocation, debt free status with surplus funds to the tune of Rs 200 crores, overall growth prospects and collaboration with FAG Group, we believe the valuations are in the fair zone (CMP – 1600) at ~10 times FY 11 (Dec ending) profit before tax.
This is not to say that the stock cannot witness any short term corrections, however 10-15% correction to ~Rs 1350-1400 will make the stock attractive for long term investment.
In this article, let’s look at FAG Bearings India, which is the second largest player in the Indian Bearings industry with ~15% market share and ~29% market share in the organized segment. Yes, as can be observed from the market share details, organized and un-organized players account for almost equal share of the Indian bearings industry.
Well, the largest player is SFK India and is again a listed company like FAG, however based on some preliminary research; we found FAG better and would therefore like to share the details on the company. Besides FAG and SKG, Timken India and NRB are two other prominent players in the organized segment.
Note: Please don’t construe this note on FAG Bearings as buy/sell advice. The readers are suggested to carry out their own due diligence.
The total size of the bearings industry in India is estimated at Rs 8,500 crores at the end of Mar’12, of which organized players accounted for Rs 4,500 crores, while the small scale companies and imports accounted for the rest.
FAG Bearings India is the second largest player in the Indian bearings industry with Schaeffler Group, Germany as the promoters of the company with 51.33% stake.
The Schaeffler Group is a privately owned major manufacturer of rolling element bearings for automotive, aerospace and industrial uses. It is a supplier to the automotive industry and one of the world‘s leading manufacturers of rolling bearings and linear products under the brands – INA, FAG and LuK for more than 120 years.
We believe, the association of Schaeffler Group is extremely critical in the success of FAG Bearings India, as all (yes, all) the large and successful players of the Indian Bearings industry are dependent on the technology provided by their foreign collaborators.
This probably also acts as an entry barrier to the growth of number of bearing manufacturers in India in the organized segment. Though, there are numerous players in the unorganized segment, however, they primarily cater to the replacement market and continue to serve the very low-end market as well as form the core of the counterfeit products in the market.
With a renewed focus on quality & reliability and with the quality of bearings manufactured by unorganized players being much inferior, the replacement market is increasingly turning to the organized sector which augurs well for companies like FAG, SKF, etc.
As can be observed from the above illustration, the company’s performance has been very good over the years and consistently delivered return on equity in excess of 20%.
During the last 5 years, both Automotive and capital goods industries (bearings are used in almost all the industries) witnessed good and bad periods, however FAG consistently delivered higher sales (even during FY 09) at the rate of 19% annualized. Similarly, the profits of the company have also grown at the same rate of 19% annualized on the back of consistently improving operating income and interest income on ~200 crore surplus funds with the company.
Yes, FAG Bearings is a debt free company, with surplus funds, as it has been able to consistently generate very good cash flows from operations.
In the very beginning we mentioned that even though SKF is the largest player, on the basis of preliminary research we find FAG Bearings a better company. Well, the various reasons behind the same are as below:
We found a striking difference in the operating margins of the two companies. While FAG has been able to maintain its operating margins in the range of 18-21% (very good), SKF’s operating margins have hovered in the range of 12-13%.
Besides operating margins, considering the rate of increase in depreciation, FAG’s been generating higher sales on its fixed assets.
Well, for the last 2 years FAG’s been running its plants at more than 100% capacity utilization and in order to overcome capacity constraints, during the calendar and financial year 2011 it spent more than 150 crores on expanding its capacities:
The performance of FAG Bearings has been excellent without being very aggressive. Yes, sometimes managements are over ambitious and become aggressive to the extent of jeopardizing the interest of all the stakeholders and therefore from the point of view of minority shareholders, it’s important that people at the helm of affairs are able and conservative at the same time.
The increasing market share of organized players is a very good sign and since unorganized players still account for ~48-50% market share, there’s enough room for companies like FAG Bearings to grow at a good pace and garner a larger pie of the overall bearings industry in India.
The holding company, FAG Group, Germany, is one of the oldest and the leading company in advance bearing technologies. With their support, FAG India should be able to maintain its competitive advantage in technology over its peers.
The long term outlook for bearings industry in India is very good on the back of growth of the Indian middle class which will accelerate demand from the automotive industry and other sectors including steel, power & heavy engineering.
Over the last few years, there have been regular increases in the prices of bearing steel which constitute a major portion of bearing costs. While FAG has been able to pass on the increased cost of raw materials and maintain its operating margins in the range of 19-20%, there’s a certain period of lag before which it is able to re-negotiate prices with its customers. Thus, in case of sharp increase in cost of raw materials or a sudden drop in demand (refer FY 09), the margins can go for a toss in a particular year.
Considering the operating performance of the company, efficient capital allocation, debt free status with surplus funds to the tune of Rs 200 crores, overall growth prospects and collaboration with FAG Group, we believe the valuations are in the fair zone (CMP – 1600) at ~10 times FY 11 (Dec ending) profit before tax.
This is not to say that the stock cannot witness any short term corrections, however 10-15% correction to ~Rs 1350-1400 will make the stock attractive for long term investment.
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