CMP = Rs 379 (as of April 27)
Price target: Rs 406
- SKF India's Q1CY2007 results are ahead of our estimates because of a strong improvement in its margins. The net sales for the quarter have risen by 21.6% to Rs359.8 crore.
- The margin improvement during the quarter was a positive surprise. I believe that the margin growth is a result of improved product mix, lesser contribution of the direct customer delivery (DCD) business and better utilisation of the new capacities.
- The operating profit margin (OPM) jumped up by 450 basis points to 16.8% during the quarter. Consequently, the OPM has improved by 450 basis points as the operating profit jumped up by 65.7% to Rs60.5 crore.
- A higher interest income and stable depreciation helped the company to post a profit growth of 62.8% to Rs36.7 crore.
- The capacity expansion plans of the company are on schedule. It would also be spending close to Rs150 crore to set up a plant in Uttarakhand.
- The company would also de-risk its business model going forward, by reducing its dependence on bearings, which currently contribute almost 90% of its sales.
- In the next three-four years, this proportion is expected to decline to 80%, while the contribution of the other business segments, namely seals, mechanotronics, and services would reach 20%.
- At the current levels, the stock quotes at 12.2x its CY2008E earnings and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.5x.
- I maintain our Buy recommendation on the stock with a price target of Rs406.