Buy SKF India Ltd For Target Rs. 2890 - ICICI Direct
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Decent performance…
SKF reported a strong Q4FY21 performance, which was broadly in line with our estimates for the quarter. Sequentially, the margin profile seems to have cooled off (base being exceptionally high) but they still remain buoyant with respect to the larger picture. The company also announced a final dividend of | 14.5 per share during the quarter.
Margins remain buoyant…
Revenue for the quarter came in at | 847.5 crore, up 38.9% YoY & 3.5% QoQ (vs. I-direct estimate of | 874 crore). Buoyant auto retails during Q4 and industrial pick-up aided the performance. Gross margins came in at 41% in Q4FY21 vs. 46.7% QoQ, 37.8% YoY. EBIDTA margins came in at 17.5% in Q4FY21 vs. 22% QoQ, 10.1% YoY. Optically, margins seem to have deteriorated significantly on a sequential basis but it is important to note that Q3FY21 margins were an exception to the normal margin profile of the company. Absolute EBIDTA came in at | 148.3 crore, up 139.6% YoY, down 18% QoQ. Ensuing PAT for the quarter came in at | 107.8 crore, up 39.2% YoY entailing a margin of 12.4%.
Recovery in capex cycle to propel industrial segment
For the last few quarters, industrial segment was on the back foot while auto segment saw a swift recovery. However, with capex announcement across the board from steel, cement and other sectors we expect industrial to perform better in coming quarters. Also, efforts are on to increase localisation and domestic manufacturing from current levels of 65%.
Clean balance sheet alongside superior return ratios
SKF remains a debt free company with ample liquidity. Going ahead, we expect the company to post RoCE & RoIC northwards of 20% led by improved margin profile and better utilisation levels. Furthermore, any upcoming capex would be funded by internal accruals. We expect SKF to post an earnings CAGR of 16.5% in FY21-23E with EBIDTA margins at 16.8%, 17% for FY22E, FY23E, respectively.
Valuation & Outlook
Taking cognisance of recent auto numbers, recovery in industrials and management commentary, we broadly maintain our estimates. We pencil in 16.5%, 21.1% & 20.6% revenue, EBIDTA & PAT CAGR, respectively for FY21- 23E. We maintain our BUY rating on the stock. We value the stock at 33x FY23E earnings with an unchanged target price of | 2890/share.
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