Result Update on FAG Bearings for 1QCY2011

For 1QCY2011, FAG Bearings (FAG) reported higher-than-expected results. The company’s top line and bottom line reported impressive growth, led by strong operating margin expansion and higher other income. We revise our revenue and earnings estimates upwards to account for better-than-expected 1QCY2011 results. However, we recommend Neutral on the stock due to the recent run up in the stock price.

Better-than-expected operating performance: For 1QCY2011, net sales grew by robust 30.5% yoy and 16.3% qoq to `310cr, better than our expectation of `276cr. Revenue performance was largely aided by a strong momentum in the automotive and industrial bearing segments. EBITDA margin expanded substantially by 521bp yoy and 58bp qoq to 20.5%, despite rising raw-material pressures. This was basically due to the decrease in purchase of traded goods, aided by favourable currency movement during the quarter. As a result,
net profit registered an impressive 90.8% yoy and 27.1% qoq increase to `43cr. Further, higher-than-expected other income helped the company to register robust growth in net profit.

Outlook and valuation: We believe healthy demand in the auto and industrial segments will aid FAG in registering a CAGR of ~16% in net sales and ~12% in net profit over CY2010–12E. We revise our revenue and earnings estimates because of better-than-expected 1QCY2011 results. After the recent run up in the stock price post strong 1QCY2011 results, FAG is trading at 14.3x CY2011E and 13.1x CY2012E earnings. Thus, we recommend Neutral on the stock.