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Solid revenue growth compensates for low gross margin

About the stock: SKF India is one of the leading bearing manufacturers known for its deep grove ball bearings and has a presence across industrial & auto sector.

* Auto & industrial have been contributing 50-50% to SKF’s topline over the years, with a slight tilt in either side depending on macros

* SKF boasts a debt free balance sheet, coupled with consistent RoCE & RoICs upwards of 20%

Q2FY22 Results: SKF reported robust Q2FY22 results.

* Revenue for the quarter came in at | 966.4 crore (I-direct estimate of | 787.2 crore), up 37.4% YoY and 39.3% QoQ

* EBITDA in Q2FY22 was at | 159.8 crore, up 40.7% QoQ

* Consequent PAT in Q2FY22 was at | 117.6 crore with a tax rate of 24.7%

What should investors do? SKF has been making strides towards innovation and R&D and has made significant inroads in REP. Going ahead, a recovery in auto, upcoming e-market & commencement of DFC should augur well for the company.

* Build in revenue, EBIDTA, PAT CAGR of 21.4%, 20.8%, 21% respectively

Target Price and Valuation:

We value SKF at | 3957 i.e. 40x P/E on FY23E EPS.

Key triggers for future price performance:

* Recovery in auto sector should improve manufacturing segment

* Upcoming DFC by mid CY22 to push out Class K bearings, coupled with metro projects in 25-26 new cities adding thrust to industrial segment

* Higher indigenisation of industrial segment bearings will lead to improvement in gross and EBITDA margins

Alternate Stock Idea: Apart from SKF, in our capital goods coverage we also like NRB Bearings.

* It offers a play on needle roller bearings, which are largely used in auto applications

* BUY with a target price of | 175 per share

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