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Margins surprise, bottomline expands …

SKF registered a handsome beat for Q3FY21 across all parameters. The company posted highest ever profitability led by improvement in topline and highest ever gross margins. Revenue for the quarter came in at | 818.7 crore, up 15.7% YoY (vs. I-direct estimate of | 781 crore). We anticipate a strong performance across the auto and industrial segment. Gross margins came in at 46.7%, an expansion of ~ 1230 bps. The significant jump in margins was on account of a reduction in purchase price of traded goods from group companies (in line with the transfer pricing mechanism that has been followed consistently). Following suit, EBIDTA margins came in at 22% in Q3 vs. 13.1% QoQ & 10.3% YoY. Absolute EBIDTA grew 148.6% YoY to | 180.4 crore. Employee cost improved 16.6% YoY to | 67.2 crore whereas other expenses registered an increase of 19.1% YoY to | 134.8 crore. Consequent to the huge expansion in margins SKF reported highest every bottomline ending the quarter with a PAT of | 128.1 crore, up 150.3% YoY. Tax rate for the quarter was 26.2%.

Auto revving, industrial to join party…

The auto segment has been revving up with festive uptick and pent up demand. However, in the last media interaction the management shared that the industrial segment was still lagging. Nevertheless, they expect Industrial to make a comeback in CY21. Overall, we expect FY21 to be at arm’s length of FY20. From there on we expect SKF to post revenue, EBDTA & PAT CAGR of 17%, 24.5% & 25.9%, respectively.

Structural change in trading segment?

During the quarter, SKF posted an expansion of ~1230 bps in gross margins. The reason cited was reduction in purchase price of traded goods from group companies. Traded goods segment for SKF contributes nearly 50% to the topline. Thus, if the recent decline in price is structural in nature, then profitability could improve significantly from here onwards. Being cautious, we build in EBIDTA margin of 15% in FY21E and thereafter 16.8% & 17% for FY22E & FY23E, respectively

Valuation & Outlook

Taking cognisance from the recent auto numbers, recovery in industrials, we revise our estimates upwards. We introduce FY23E numbers and pencil in 17%, 24.5% & 25.9% revenue, EBIDTA & PAT CAGR for FY21E-23E, respectively. Hence, with improved outlook and enhance visibility, we upgrade the stock from HOLD to BUY valuing the stock at 33x FY23E earnings with a target price of | 2890/share (earlier | 1615).

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