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Other income spurt & lower tax rate saved the day

SKF India disappointed once again on YoY revenue growth as well as on gross and EBITDA margin. However, large growth in other income and huge decline in the tax rate allowed the company to clock a YoY growth in PAT. Other noteworthy thing is QoQ recovery of 568 bps in Gross margin which underscores the volatility on quarterly basis. Revenue has been lower while PAT has been higher than our and consensus estimates. The highlights of the results have been whopping 985 bps YoY decline in the tax rate to 25.3% and a huge 82% YoY spurt in the other income. This has resulted in YoY PAT growth of 13.5% to Rs1,322mn (Centrum–Rs1,236mn/Consensus-Rs1,219mn). Otherwise, PBT registered a marginal YoY decline of 1.5%. Revenue up by 1.4% YoY to Rs10,923mn(Centrum–Rs11,634mn/Consensus–Rs11,811mn). EBIDTA margin lowered by 130 bps to 15.8% (Centrum-15.8/& Consensus- 16.3%) resulting in 6% YoY drop in EBITDA to Rs1,725mn (Centrum-RS1,835mn/Consensus-Rs1,925mn). Accordingly, we cut Revenue/PAT estimates for FY24 by 2.7%/2.5% respectively. However, we believe SKF India will clock lower double digit YoY revenue growth in FY25E and FY26E led by domestic demand and decision to relocate volumes to India by SKF AB. Gross and EBIDTA margins to bounce back to near long range average from FY25E. Hence, we assign the same PE multiple of 40x to 1HFY26E EPS of Rs127 to arrive at a TP of Rs5,095 with ADD (earlier REDUCE).

SKF AB announced shifting of production to India in the Dec-23 results call

SKF AB continues with restructuring in its German operations by gradually moving some assortment volumes to China and to India to further enhance its regional competitiveness. In Asia, SKF AB announced the closure of its plant in Busan, Korea, with production volumes being moved to Mexico, China, and India. Furthermore, they are also ramping up capacity and broadening the assortment in India to further fuel profitable growth in this important region. However, how much of this volume comes to the listed entity remains to be seen. We believe, the listed entity is well placed to grab additional revenue generating opportunities arising out of relocation of volumes to India.

Revenue growth driven by growth in off-highway, automation & light vehicle

4QCY23 results presentation and transcript of SKF AB reveals segmental revenue performance for India in 3QFY24 which includes listed entity as well. In the industrial segment, sales were slightly lower in the quarter. By industry, sales to off-highway and automation were significantly higher. To material handling it was higher, to heavy industries it was slightly higher while sales to other, aerospace and railway were relatively unchanged. Sales to industrial distribution, high-speed machinery and electrical drives were slightly lower while sales to renewable energy, agriculture, food and beverage, marine and traditional energy were significantly lower compared to same period last year. In automotive segment, sales in the quarter were higher compared to last year with significantly higher sales to light vehicles and lower sales to the vehicle aftermarket and commercial vehicles.

Risks

Volatility in gross margin and missing revenue growth

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