Anand Rathi - NRB Bearings - Decent performance in tough times; Buy
Rajesh Desai
Revenue exceeds expectations, earnings grow. NRB Bearings’ 2QFY14 revenue (7.9% above what we expected) was up 3.3% yoy. EBITDA came 8.9% higher while PAT was 7% lower. Despite sluggish growth in the domestic auto sector, its mainstay, the company widened its yoy margins; revenue growth, though, was aided by more exports. Because of the higher tax rate, PAT declined 7%. PBT was 4% higher yoy.
Subdued automobile mars domestic demand for bearings. In 2QFY14 revenue growth slowed to 3.3%, while in 1H revenue declined 1.6%. The decline in the domestic business was somewhat countered by more exports. NRB’s long-term focus is on more export revenue. In FY14 it is expected to increase exports 20-25%. In 2Q it had lost `40m-50m revenue on account of NRB Industrial Bearings being hived off.
Margin rise despite subdued revenues and higher raw material costs. In spite of higher raw-material cost, the margin rose 87bps yoy to 17.1%, (16.2% a year ago). Raw-material cost (as percent of sales) jumped 124bps to 40.3%, but the company saved over 200bps on employee cost and other expenditure. In the long run, the export-led strategy would lead to a wider margin.
Near-term outlook weak; exports, the silver lining. While revenue and EBITDA growth were lower in 2Q, more revenue from new export clients should pick up, and its domestic business, which has bottomed out, start to inch up. Economic growth, expected to improve in the next few quarters, augurs well for the company. Besides, its exports business continues to gain size. This could improve margins.
Our take. With prospects for the economy looking up and NRB’s prospects too expected to look up, we maintain a Buy. The stock trades at 5.7x one-year-forward EPS. Our target is based on 7x FY15e EPS. Risks: Keener competition, higher input costs.
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CA. Rajesh Desai