FAG Bearings Review and Analysis
Industry outlook encouraging: We expect a substantial uptick in the industrial segment in the next three-four quarters, driven by higher demand from capital goods companies. The auto segment is also expected to grow, led by a ~12.3% CAGR in auto sector volumes over FY2010-12E. FAG has a strong customer base, including Maruti, M&M, Tata Motors, GM, Ford and Daimler Chrysler, in this segment.
Strong fundamentals and attractive valuation: FAG's net asset turnover remains high (over ~6x in CY2010E) due to largely depreciated assets. The company's strong business model enables it to record robust and consistent RoCE of 30-33%. Cash flow generation is also expected to remain healthy. On the valuation front, the stock is attractively priced at 9.4x CY2012E EPS vs. peer average of 12x CY2012E EPS. We maintain Buy on the stock with a Target Price of Rs.1,035, valuing the stock at 12x CY2012E earnings.
Key risks to our call include: 1) Lower demand and a substantial increase in steel prices, which can exert pressure on margins, 2) adverse currency movement, which can impact FAG's trading business and 3) cheap imports from China.
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