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Robust numbers, maintain BUY…

NRB Bearings posted robust numbers that were largely above our estimates on all parameters. Margins expanded on the back positive operating leverage. Revenue for the quarter came in at | 244.7 crore, up 33.7% YoY (vs. I-direct estimate of | 220 crore). We expect the robust growth to be attributable to festive uptick and pent up demand. Gross margins expanded 20 bps but EBIDTA margins improved ~680 bps to 17.6%. NRB registered an absolute EBIDTA of | 43.1 crore, up 117.7% YoY. Other expenses increased 18.7% YoY to | 70.6 crore whereas employee cost grew 12.7% YoY to | 38.5 crore. Ensuing PAT came in at | 23.3 crore, up 121.3% YoY. Tax rate for the quarter was at 29.8%.

Buoyant margins in quarter but unsustainable…

NRB exited the quarter with an EBIDTA margin of 17.6%, which grew ~ 680 bps YoY. This was largely on account of positive operating leverage and low cost steel inventory. We are sceptical that these margins will be sustained in the coming quarters, given the sharp rise in input (steel) prices in recent months. We build in 14% EBIDTA margins for FY21E and 15.7% for FY22E & FY23E, respectively.

Cyclical upswing can lead to rerating…

FY20 was marred by a slowdown in the auto sector, which impacted NRB that has ~70% of the topline coming from domestic OEMs. This was followed by the lockdown wherein demand literally came to a halt. However, post Q1, Q2 & Q3 numbers showed signs of a recovery. Hence, on a 9M basis, the company is down only 13%. We believe a strong Q4 can help reduce the gap further, thus reaching arm’s length at last year’s revenue. We build in FY21E revenue at | 728 crore.

Valuation & Outlook

NRB’s performance is largely correlated to the domestic auto segment as ~70% of the topline comes from domestic OEMs. The past two quarters showed signs of a strong recovery. Further auto volumes in January also came in strong. Also, even with a rise in steel prices, we expect NRB to emerge with EBIDTA margins of 15.7% for FY22E & FY23E led by positive operating leverage. We introduce FY23E and build in revenue, EBIDTA and PAT CAGR of 8.9%, 22.3% and 36.5%, respectively, in FY20-23E. We estimate an EPS of | 8.4/share for FY23E that implies earnings yield of 7% at CMP. Reflecting the improved outlook for NRB, we upgrade the target price to | 150/share (earlier | 110) and maintain our BUY rating on the stock.

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