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Focus on localisation to boost growth…

About the stock: SKF India, incorporated in 1961, is engaged in manufacturing of bearings, seals, lubrication systems, after-market and other maintenance products

* Company’s ~52% of revenues come from industrial segment while ~41% of revenues come from automotive segment. Balance ~7% of sales is from exports. After-market segment contributes ~36% of total revenue

* Consolidated revenue of the company has grown by 14.9% CAGR during the period FY20-23 while EBITDA and PAT have grown by 29.0% and 22.0% CAGR respectively over the same period. During FY23, company reported revenues of ? 4304.9 crore (+17.4% YoY) with EBITDA of | 749.3 crore (+34.8% YoY) and PAT at ? 524.5 crore (+32.7% YoY)

Key Investment Thesis:

* Strongly positioned with wide product offerings & market presence; Focus on high-growth segments: With a rich experience in design, development and manufacturing of bearings, seals and lubrication systems, SKF India is well positioned with its wide range of products & services for its industrial and automotive segments. Moreover, the company is focusing on highgrowth areas in these segments like electric vehicles, renewable energy, railways, mining etc, where it targets to capture the larger pie of this opportunity and thus increasing its share through optimising product mix & innovative solution

* Emphasis on continuous advancement of products; Increasing localisation and services & after-market business: The company has a strong focus on continuous advancement of its products and solutions through its ability to continuously develop new technologies and innovation with more localisation of raw materials and manufacturing of products. Moreover, company is focusing on increasing its services & after-market segment (which contributes ~36% contribution to total revenues). We believe that new product solutions, more localisation and increase in after-market business would help company in improving its overall margins

Rating and Target Price

* SKF India is well placed to ride the strong demand cycle in domestic bearings market, led by its focus on high-growth sectors, new product developments and increasing localisation of products. We believe company’s operational and financial performance to improve considerably in the coming period. We estimate revenue, EBITDA and PAT to grow at 15%, 20% and 22.8% CAGR respectively over FY23-25E

* We maintain our BUY rating on SKF India. We value the stock at | 6400 per share (based on 40x FY25 EPS)

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