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Decent performance led by better margins…

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

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

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

Q2FY23 Results: SKF reported decent Q2FY23 results.

* Revenue for the quarter came in at | 1078.3 crore (I-direct estimate of | 1105.9 crore), up 11.6% YoY, 2.2% QoQ

* EBIDTA margins came in at 19.9% vs. 17.4% in Q1FY23. Absolute EBIDTA came in at | 214.6 crore (I-direct estimate of | 201.3 crore), up 16.8% QoQ

* Ensuing PAT came in at | 155.8 crore (I-direct estimate of | 141.7 crore) compared to | 129.2 crore in Q1FY23

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

* We continue to remain positive and retain our BUY rating on the stock

Target Price and Valuation: We value SKF at | 5215 i.e. 40x P/E on FY24E EPS.

Key triggers for future price performance:

* Focus shifting towards indigenisation of industrial bearings

* Strong traction from railways, focusing on increasing market share in aftermarket products

* Increasing its presence in Tier 3 cities, increasing market share in key segment

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 | 220 per share

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