This stock is at an inflection point after strong Q2 performance. Can double in next 6-12 Months.

Categories: Blog
December 12, 2017Posted By Admin

NRB Bearings Ltd (NBL) is in the business of manufacturing ball and roller bearing for the requirements of the mobility industry. It was the first company to manufacture needle roller bearings in India. The company also manufactures cylindrical bearings, special tapered roller bearings and special ball bearings. With a proven track record of over 50 years, it is the preferred supplier to leading domestic OEMs such as Hero MotoCorp, Bajaj Auto, Maruti Suzuki, Tata Motors and Ashok Leyland, among others. As most of company’s business is coming from domestic OEM’s, NBL is the key beneficiary of robust growth in the automobile sector.

NBL derives its 65% of revenues from domestic OEM’s, 20% from export market and 15% from after market segment. NRB enjoys 70% market share in needle roller bearings. In the domestic market company has diversified revenue stream with 2W contributing 30%, CV 28%, PV 15%, farm and Half Highway 10% and aftermarket 15%. NLB’s client portfolio is also well diversified and any customer’s average contribution to revenue is not more than 10%. The top 10 clients’ contribution stands at 50% of the top-line.

 

Revenue breakup:

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When it comes to performance the company’s growth has been in line with industry growth. NRB’s revenue growth of 6% CAGR over FY13-17 is identical to the overall auto sales volume growth of 6% CAGR in the same period, thereby clearly reflecting a strong correlation with domestic automotive industry growth.

 

Strong moat with leadership position in Needle Roller bearings:

Needle roller bearing is a niche product and is used where the axial or thrust load is high. Owing to its compact size, the needle roller bearing is the preferred choice for applications like steering systems, gear boxes, front axles, engines etc. With the increased use of electronics and of automation in 4Ws, and the requirement to make engines, transmission and steering lighter and more compact, we expect the use of needle roller bearings to increase over time.

NRB commands ~70% share in the organized needle roller bearing market. Another key player is INA Bearings, part of the Schaeffler group, Germany. Needle roller bearings constituted around 43% of NRB’s topline in FY17. Being light, this translates into lower material costs, making them high-margin products. Another key product in NRB’s stable is the cylindrical bearing. Needle and cylindrical bearings form 68% of NRB’s top-line.

As NRB prefers working with automotive OEMs from the product development stage, it has a strong affiliation with them. The principle advantage of this is that if selected, NRB is the sole or main supplier for the first few years (normally five). This helps it in keeping margins and market share high, and also the competition at bay.

 

Improving export business performance:

NRB is among the few manufacturers of needle roller bearings globally along with INA, Koyo, Nadella and NSK, among others. Company enjoys various advantages over its competitors in export market due to cost advantage, technology at par with MNCs, high customization and willingness to supply smaller batch sizes, low turnaround time and working with the customers from the design stage helps build a rapport and bag orders.

NRB exports to global OEMs like Renault Volvo, VW and Daimler Trucks. The company exports to Europe, US and Latin America. Europe and US together contribute ~65% to the total export revenue. After a period of strong growth (~27% CAGR over FY12-15), exports fell over the last two years, owing to a slowdown in Europe and fall in the Euro-INR exchange rate.

However, the situation has improved in the last few months. Revenue from exports picked up during H1FY18 with the growth of 15%. This is driven by the combined impact of a pick-up in orders from the heavy truck segment in North America, growth in the European PV market, and appreciation of the Euro. Revenue from other geographies (ASEAN region and Iran) also supported export growth.

The company is looking at the Defence, Aerospace and Railway segments as sources of incremental revenue. (Aggregate Rs.60cr by FY19E).

 

Posted strong operational performance in Q2FY18:

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NBL has seen strong operational performance in 2QFY18, on both the revenue and margin fronts. Revenue came in at Rs 208cr (+16% YoY), fuelled by strong growth across segments like 2Ws, PVs, CVs and tractors. EBITDA stood at Rs 38.3cr (+33% YoY). EBITDA margin came in at 18.4% against 15.3% in Q1FY18 and 16.1% Q2FY17, benefitting from operating leverage and a rich product mix. PAT came in at Rs 21.1cr (+25% YoY).

Fundamentals to improve further:

We expect the company’s topline to grow at double digit rates over the next few years. With the better product mix and improved operating leverage we expect the operating margins to improve further (from 16.5% in FY17 to 18.5% in FY19E. PAT to grow at higher rate at 24% CAGR over the next few years due to debt repayments and improved performance.

NRB’s ROCE is lower than peers, despite better operating margins, as the company has lower asset turnover (absence of traded revenues) and higher working capital requirements. However with improved performance ROE and ROCE are expected to increase to 20% and 15% by FY19E from 18% and 11% in FY17, respectively.

Company has high working capital requirements due to Lower sales from the aftermarket business and Company maintains a large number of SKUs. Management is more focused on efficiently managing the working capital which is expected to yield good results in times ahead.  Strong topline growth, coupled with an improvement in margins, is expected to boost the operating cash flow for NBL, going ahead.

The Indian automotive industry is expected to grow at double digits for the next five years. With its niche product basket and high market share NBL is going to be the key beneficiary. Company is trading at decent valuations of 18x FY19E earnings. Investors who have the time horizon of 1-3 years can buy the stock at current levels.