FAG Bearings India - Rolling Along Smoothly

In a wildly gyrating market, there is an obvious flight to safety, with a lot of focus on capital protection than anything else. But here is FAG Bearings India (FAG) that could not only stabilise your portfolio, but also provide you with good capital appreciation. Besides, when you get a company growing at a five-year CAGR of 21 per cent and 19 per cent in topline and bottomline respectively, which is debt free, has liquid cash, a 20-year dividend history and is yet available at CY11-estimated PE of just 12x, the stock is a ‘must grab’ at its CMP of Rs 1261.

FAG is a manufacturer of ball bearings in India, and is one of the leading OEM suppliers to the automotive and the industrial sector as well as the Indian Railways. Nearly 90 per cent of its revenues are derived from the domestic market, while the balance is from exports. While looking at the user industries, which are currently witnessing a slowdown, many would be apprehensive about FAG. However, we believe this scrip will do well on the bourses going forward. The primary reason is that in a volatile market where investors are looking out for fundamental bets available at low valuations, FAG seems to fit the bill. The company has not only continued to stage a strong performance but its valuation also is quite appealing.

In fact, its peer SKF India, which is twice FAG’s size in revenue terms, is available at 15x. Further, it is a scrip that gives you the best of both worlds − consistent dividends and capital appreciation. As mentioned earlier, FAG has a 20-year dividend paying track record (2010 dividend at 50 per cent on FV of Rs 10). On an YTD basis, while the the Sensex is down 17 per cent, FAG is up 41 per cent even in these trying times. No wonder institutional investors have stayed invested, holding an average of 25 per cent stake in the company over the last three quarters.

Besides, FAG is the second-largest player in the domestic market with a market share of around 15 per cent. It is a leader in the spherical roller bearing segment with a 55 per cent market share. The other advantage of being a market leader is that companies such as FAG can have a preferred vendor status, and hence, even if the user industry is currently witnessing a slowdown, the impact on companies such as FAG who supply to most of the auto giants of India could be minimal.

That apart, FAG is a debt-free company with good liquid cash to the tune of Rs 298.69 crore or Rs 179 per share in its books. This brings twin benefits. First, with no interest outgo, its margins stay healthy while the rising interest rates, due to higher cash balance, helps in earning higher ‘other’ income. For H1 CY11 (the company closes its books in December) FAG’s revenues were up 23 per cent to Rs 628.99 crore (Rs 510 crore), and profits were up 56 per cent to Rs 87.60 crore (Rs 56.31 crore).

Interestingly, FAG’s operating margins are much higher at 20 per cent compared to 13.6 per cent of SKF and these have grown by 300 bps YoY in H1 CY11, whereas SKF has seen marginal erosion in the same. However, looking at the auto and industrial slowdown, its numbers may come under pressure. But still at CY11-estimated sales and profits of Rs 1250-1260 crore and Rs 170-175 crore respectively, FAG is available at PE and EV/EBIDTA of 12x and 6.92x respectively, making it a good grab with a one year target of Rs 1500.