Company Visit Note

24th August 2010

NRB Bearings
Good Bearing Ahead for the Industry

Company Update

Key Take Away

CMP (Rs) Recommendation 110.8 Not Rated

Scrip Details
Market Cap (Rs crores)** P/E (x) FY11E Equity Capital (Rs crores) Face Value (Rs) 52 Week High/Low (Rs) 537 13.7 9.69 2.0 116.7/44.0

We recently visited NRB Bearings to get a sense of the Bearings Industry. As we expect the FY11 growth for the Automobile Industry to be in the range of 15%-20% with 2 wheelers growing by 15%, Passenger Vehicles by >15% and Commercial Vehicles by 20%, we see growth momentum among the bearings industry. Bearing industry demand, which is a market size of Rs5700cr, is derived from the key user segments Automobile & Industrial, with Automobile accounting for 50% of the demand. But first let us understand - What is a Bearing? Bearing is a device, which reduces friction and enhances the motion between objects. Known as anti friction components, they are widely used applications in Automobiles, Fans, Pumps, Gear box, Heavy earth moving equipments, Heavy industries such as steel plants, sugar plants, process plants, cement plants & power generation units.

Website: www.nrbbearings.com NSE Code Sensex Nifty **Free Float Mcap: Rs 161cr NRBBEARING 18409 5543

Shareholding Pattern (%)

As on June 2010 Promoters MFs, FIs & Banks Total foreign (FIIs, ADR/GDR) Other Bodies corporate Public and others Comparative Price Movement % 73.75 5.17 7.88 6.98 6.21

Key Findings

Industry Profile
Industry Size The Indian bearing industry is a market of Rs5700cr, catering to both Automobile & Industrial demand. Automobiles account for 50% of the bearings demand. Industrial demand sees demand coming from the Metals & Mining Sector, Cement , Power sector. We see rapid growth in the demand for bearings as the major consumer industries are ramping up production levels as a response to the huge demand. Market dynamics The demand is met from the organized sector, unorganized sector & by imports. Organized sector meets 60% of the demand, represented by Original Equipment Manufacturers (OEM) among the Automobile, Railways and Industrial Sectors. The unorganized sector is basically the replacement market, which caters to low counterfeit products, meeting 15% of the demand. The balance 25% is met by imports mainly in the replacement market, which is a threat to the domestic suppliers/bearing players such as FAG Bearings, SKF India, NRB Bearings, Timken India & ABC Bearings. Historically imports have been a threat as this caters to larger bearings, which previously was not manufactured in India. But going forward, the market is moving towards the organized players. One major milestone, yet to surpass: Historically the bearings industry has grown at a CAGR of 8%pa. If we have to see the industry grow at 20%pa, with a preference towards organized players we would have to see extensive capacity ramp up and product development to meet the new age user requirements.

125 100 75 50

NRB Nifty (RHS)

6000 5500 5000 4500 4000

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Sr. Analyst : Sejal Jhunjhunwala Email: sejal@way2wealth.com Contact: 022 40192918

15/A Chander Mukhi, Nariman Point, Mumbai - 400 021. Tel: +91 22 4019 2900 email: research@way2wealth.com website: www.way2wealth.com

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Company Visit Note

NRB Company Profile

NRB is the 4th largest bearing company with a market share of 12% in the organized bearing sector, which is a market size of Rs 3200 cr. Its mainly into the manufacture of needle roller bearings which account for ~55% of its revenues.It has 6 plants across Thane (Eng center) , Waluj (Aurangabad ) , Jalna , Pantnagar (Uttarakhand). It has 2 subsidiaries SNL Bearimgs (68.8%) which is profitable as of FY10 financials and NRB Bearings (Thailand 100%) which is loss making. The Thailand subsidiary was formed with an investment of Rs 20 cr , the plant present here is to cater to the ASEAN & SAARC Two wheeler and Light Commercial Vehicle (LCV) market. It has a capacity to produce 32mn pieces out of which 70% are for exports and 30% for the Thai market. It would benefit from the Free Trade Agreement (FTA) between India and Thailand. The subsidiary is likely to go on stream from Q4FY11, which would trigger the companys exports. Currently if we see SA NRB Bearings, it exports forms 10% of its revenues. The company has a target of touching 20%-25% in the next 2 years. It also has a JV with Schneeberger India (45%). Top 5 customers are Tata Motors, Mahindra & Mahindra, Ashok Leyland, Bajaj Auto & Hero Honda, accounting for 40%-50% of the companys revenues. But no single customer accounts for >10%, which has resulted into a diversified client profile. Among global clientele includes Daimler, Volvo & Volkswagen. Non-Auto clients include TAFE, Siemens, ABB, Lucas and LMW. Category wise Revenue Break up OEM:Replacement 72:28 Domestic:Exports 90:10 Automobile (including farm equipments like Tractors):Others 60:40

Investment Positives
USP of NRB The USP of NRB is that it supplies all types of bearings with dominant presence in the needle roller bearings. They also supply light-weight bearings where the load requirement is not very high. Such bearings are used in Automobiles Gears, Clutches & Brakes. Product profile of its peers is given below for a better understanding. Company SKF India Type of Bearing User Industry Automobile, Industrial & Textile Machinery Components

Ball Bearings & Taper Bearings Ball Bearings, Cylindrical Roller Bearings, Tapered Bearings & Automotive Mechanical, Railways, FAG Bearings Spherical Bearings Electrical Engineering Industries ABC Bearings Ball , Taper, Cylindrical Bearings Automobile Timken India Tapered Roller Bearings Automotive,Railways All types, and the only manufacturer NRB Bearings of Needle Roller Bearings* Automobile, Industrial * But FAG Bearings plans to enter the needle roller bearing segment, may prove to be a threat. Capacity Expansion on the cards The industry had witnessed a slowdown from FY08-FY09 on account of which the bearing capacity was left idle. NRBs capacity for Ball & Roller Bearings remained more or less the same in FY09, but the utilization levels fell from 76% in FY08 to ~59.8% in FY09. But in FY10, especially in the second half, we saw a strong comeback by the automobile industry, which generated demand higher than expected. This improved NRBs utilization levels to 76% in FY10. Infact we also saw a 10% uptick in capacity levels which brought about a 40% improvement in production. The average utilization levels for NRB is at 72%.

15/A Chander Mukhi, Nariman Point, Mumbai - 400 021. Tel: +91 22 4019 2900 email: research@way2wealth.com website: www.way2wealth.com

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Company Visit Note

In order to grow >20%, the company has indicated that it intends to undertake capacity expansion at its Waluj & Jalna plant by 25%. But this would be over a period of time , and the capacity would be ramped up as and when it sees higher demand from its customers. Additionally, the companys tax beneficiary plant at Uttaranchal, is doing revenues of Rs 45cr Rs50cr, which is 14% of the total revenues if we look at its FY10 financials. Higher produce would be seen from this plant once its customers like Ashok Leyland and Bajaj Auto ramp up their plants at Uttaranchal. But for FY11, we have taken the effective tax rate at 33%. Note: NRB has been generating higher revenue on account of its product development activities happening at its engineering center at Thane. Infact, in the last 3 years 40% of the revenues are from product development. A higher proportion of the same going forward would help NRB in increasing its market share. Business Performance shows a comeback in FY10 The companys operating margin shows an improvement of 270bps over FY09 at 16.6% and a significant jump is seen in the EPS from Rs 0.9 to Rs 5 in FY10. Additionally, with a Rs49cr reduction in debt at Rs 80cr, the ROCE has improved from 7% to 12%. Going forward, the company has capex plans of Rs 100 cr every 2 years, which would be met by internal accruals, a case in perspective would be its Free Cash Flow to firm yield (FCFF) has improved from 2.2% to ~12% in FY10. Therefore the ROCE is not expected to come under pressure. But it has announced a bonus issue of 1:1, whose impact is yet to be accounted for. At the same time if we see its FY10 debt-equity ratio it is at 0.4x, with a interest coverage ratio of 4.8x and cash realization ratio of 3.1x, which implies that the company is in a comfortable position to raise debt if required. Note: Most bearing companies are debt-free companies, with the exception of NRB & ABC Bearings.

Trend in Financials FY08 FY09 FY10 Business Perf 330.1 299.5 335.7 Sales Rs cr 20.6 13.9 16.6 OPM % 10.1 1.4 7.3 PAT % 6.9 0.9 5.0 EPS (Rs) 2.2 1.5 1.8 Div Yield (%) 17.8 7.2 12.1 ROCE (%) Asset Turnover (X) 1.3 0.9 1.08 Source: W2W Research The Asset Turnover ratio has improved over FY09, but if we see the previous peak cycle of FY06, where it was at 1.5x, the company is yet to touch those levels.

Investment Negative
Global Players have a dominant share in the industry The organized domestic bearing industry comprises of FAG Bearings, Timken & SKF India who have dominant market shares as they have global tie ups. SKF India has a market share of 40%, FAG has a market share of 14% as against NRB Bearing market share of 12%. NRB Bearings was established in 1965 as an Indo French JV with financial and technical collaboration with Nadella, which has been terminated since November 2005. This gives us the sense that the company falls short when it comes to its market positioning. Note: Global players (there respective tie-ups) have a dominant share in the industry as the industry is characterized with high-end technological requirements and the need for high capital, which basically pose as entry barriers for the industry.

15/A Chander Mukhi, Nariman Point, Mumbai - 400 021. Tel: +91 22 4019 2900 email: research@way2wealth.com website: www.way2wealth.com

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Company Visit Note

Peer Analysis
Company FY10 ABC FAG SKF India Timken Price 23rd Aug 158.2 820 582.2 164.9 182 1362 3070 1050 180.7 847 594 179 116.7 Mcap 52weekH Sales OPM% Pat margin% Equity FY10 167.6 1020 2025.9 439.3 349 FY10 22.4 15.1 10.1 17.6 16.9 FY10 10.1 8.2 6 10.2 7 11.55 16.6 52.73 63.7 9.7 fv Eps Asset Turnover FY10 2.5 1.83 2.33 1.04 1.3 2.8 0.9 3.6 0 1.8 DivYield(%)

Q1FY11 Rs FY10 10 17.04 10 10 10 2 43.8 23.4 5.7 5.04

110.8 537 NRB Source: W2W Research Company FY10 ABC FAG SKF India Timken

P/E(x) FY10 9.3 18.7 24.8 28.6

P/BV(x) Mcap/Sales(x) Debt Equity(x) int cov(x) 1.3 2.9 4.3 2.7 0.7 1.3 1.5 2.4 0.3 0 0 0 12.5 NA NA NA

ROCE(%) 25 26 23.5 14.5

21.6 2.8 1.5 0.4 4.8 12.1 NRB Source: W2W Research As SKF India, FAG & Timken follow CY as year-end; we have taken CY09 into consideration and have annualized sales. The EPS is on TTM basis Key Remark As seen from above, FAG & SKF India are clearly the leaders. The asset turnover rations are attractive for the whole industry, while ROCE is attractive for ABC,FAG & SKF. But from a valuation perspective FAG still looks attractive at the current levels, while SKF looks overvalued. ABC looks attractive given its undervaluation, ROCE & Div Yield. Among the pack, NRB doesnt look all that attractive at this point, given its P/BV ROCE and Mcap/Sales. Note: Both SKF India & FAG Bearings have exposure to trading revenues as a part of their total revenues, whilst NRB Bearings reports pure revenues from its product segments.

15/A Chander Mukhi, Nariman Point, Mumbai - 400 021. Tel: +91 22 4019 2900 email: research@way2wealth.com website: www.way2wealth.com

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Company Visit Note

Financials
NRB Bearings Results - Rs cores Net Sales Total Expenditure Operating Profit OPM(%) PBT PBT(%) PAT PAT(%) Equity Share Capital EPS Q1FY11 100.5 78.3 22.2 22.1 17.9 18.1 12.1 12.0 9.7 2.5 Q1FY10 75.2 62.7 12.6 16.7 6.9 7.7 4.7 6.3 9.7 0.9 157.5 157.7 156.5 % Chg YoY 33.6 25.0 76.3 Q4FY10 102.7 82.1 20.6 20.1 14.4 13.9 9.3 9.1 9.7 1.9 31.8 30.1 24.3 % Chg -2.1 -4.6 7.8 FY11E 405 322.6 82.4 20.3 58.4 14.4 39.1 9.7 19.4 4.03 60.3 60.3 57.2 % Chg YoY 15.7 10.9 39.7

Source: W2W Research, Company Note: As the company is coming out with a bonus issue of 1:1, we have taken FY11 Equity Capital at 19.4cr and for comparative purpose we have taken the same for FY10. We get FY11E EPS of Rs 4.03,and with a post bonus price of Rs55.4, we get a P/E of 13.7x.

Conclusion
As at the CMP of Rs 110.8 the company quotes at a fwd P/E of 13.7x, we find it over-valued as compared to its peers like FAG & SKF, which trades at a fwd multiple of ~10x and SKF at 12x. Especially, since FAG & SKF India are the leaders in the industry, NRB should conceptually trade at a discount to them. According to us, a key trigger for the stock would be the execution of its capacity expansion plans as that would place them in a ideal situation of gaining market share. But at the same time, higher volumes with supportive market positioning is needed to make them win a larger pie of the market. Our estimates have factored in the near term bonus offer, post which we get a forward earning of Rs 4.03. At this point we do not rate the company, as we are still reviewing the Bearing Industry on account of its potential (as mentioned above).

15/A Chander Mukhi, Nariman Point, Mumbai - 400 021. Tel: +91 22 4019 2900 email: research@way2wealth.com website: www.way2wealth.com

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Company Visit Note

RESEARCH TEAM
K.N.Rahaman Jigisha Jaini Nisha Harchekar Sejal Jhunjhunwala Abhishek Kothari Vishwa Doshi Krishna Reddy MSR Prasad Prateek Jain Ritu Gupta Aditya Agarwal Amrut Deshmukh Arun Kumar Rupali Prabhu Deputy Research Head Sr. Research Analyst Sr. Research Analyst Sr. Research Analyst Research Analyst Research Analyst Research Analyst Research Analyst Sr. Research Analyst Research Analyst Sr. Derivative Analyst Sr. Technical Analyst Technical Analyst Research Assistant Contact Equities & Commodities Capital Goods & Engineering FMCG, Hotels, Media Auto, Shipping & Metals Banking, NBFC & Financial Services IT, Telecom, Midcaps Commodities, Economic Update Commodities Mutual Funds & Economic update Mutual Funds Derivative Strategist & Technicals Technical Analysis Technical Analysis - Commodities Database Management rahaman@way2wealth.com jigishajaini@way2wealth.com nishaharchekar@way2wealth.com sejal@way2wealth.com abhishekkothari@way2wealth.com vishwadoshi@way2wealth.com krishnareddy@way2wealth.com Prasad.m@way2wealth.com prateek@way2wealth.com ritugupta@way2wealth.com aditya@way2wealth.com amrut@way2wealth.com Arun.Kumar @way2wealth.com rupali@way2wealth.com 022-40192900

15/A Chander Mukhi, Nariman Point, Mumbai - 400 021. Tel: +91 22 4019 2900 email: research@way2wealth.com website: www.way2wealth.com

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Company Visit Note

DISCLAIMER
Analyst Certification: I, Sejal Jhunjhunwala, the research analyst and author of this report, hereby certify that the views expressed in this research report accurately reflect our personal views about the subject securities, issuers, products, sectors or industries. It is also certified that no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst(s), principally responsible for the preparation of this research report, receives compensation based on overall revenues of the company (Way2Wealth Brokers Private Limited, hereinafter referred to as Way2Wealth) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. Disclaimer This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Way2Wealth is not soliciting any action based upon it. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any such transaction. The contents of this material are general and are neither comprehensive nor appropriate for every individual and are solely for the informational purposes of the readers. This material does not take into account the specific objectives, financial situation or needs of an individual/s or a Corporate/s or any entity/s. This research has been prepared for the general use of the clients of the Way2Wealth and must not be copied, either in whole or in part, or distributed or redistributed to any other person in any form. If you are not the intended recipient you must not use or disclose the information in this research in any way. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. 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