date: 25th february, 2019 · contributing to the growth are i) growing automobile industry and...

Date: 25th February, 2019

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Equity Research Pick of the Week – Retail Research

Implementation of Bharat stage VI emission control norms

to trigger pre-buying in CVs in FY20

Make-in-India initiative to attract global manufacturers

Debt repayment to bring down finance costs

NRB Bearings Limited

INDUSTRY

CMP

RECOMMEND

ADD ON DIPS TO

SEQUENTIAL TARGETS

TIME HORIZON

Auto Ancillaries

Rs 186

Buy at CMP and add on declines

Rs 164-168

Rs 209.5-222.5 Rs 153

3-4 quarters

Investors may sell 60-65% of their holdings on first target being achieved and later keep a stop loss of first target for the balance holdings, in case the second target takes time to be achieved.

Investors may also maintain Rs 153 as level, below which investment position needs to be reviewed, including the possibility to exit.

Key highlights

India’s Automotive Bearings Market is projected to grow

at a CAGR of 13%

R&D focus to expand market

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HDFC Scrip Code NRBBEAEQNR

BSE Code 530367

NSE Code NRBBEARING

Bloomberg NRBBR IN

CMP Feb 22, 2019 185.95

Equity Capital (mn) 193.8

Face Value (Rs) 2

Eq- Share O/S (mn) 96.9

Market Cap (Rs mn) 18023

Book Value (Rs) 39.0

Avg.52 Wk Volume 2,11,000

52 Week High 223.6

52 Week Low 140.1

Shareholding Pattern % (Dec 31, 2018)

Promoters 52.67

Institutions 33.15

Non Institutions 14.18

Total 100.0

FUNDAMENTAL ANALYST

Atul Karwa [email protected]

Company profile: Founded in 1965, NRB Bearings (NRB) was the first company to manufacture needle roller bearings in India. For over 40 years, NRB has pioneered the leading edge of bearing technology, and is a recognised leader in needle roller bearings. It is the largest manufacturer of needle roller bearings in India, with ~70% segmental market share. With 65% revenue coming in from domestic OEMs, NRB is expected to be a key beneficiary of robust growth in the automobile sector.

Investment rationale: • Implementation of Bharat stage VI emission control norms to trigger pre-buying in CVs in FY20 • India’s Automotive Bearings Market is projected to grow at a CAGR of 13% • Make-in-India initiative to attract global manufacturers • R&D focus to expand market • Debt repayment to bring down finance costs • NRB has exposure to all segments within the Auto industry and hence is relatively insulated from slowdown in anyone

Concerns: • Vulnerable to cyclicality in demand from automobile OEMs • Threat from spurious / counterfeit products • Continuous investment in R&D • Raw material price volatility • Forex risk may impact financial performance

View and valuation: NRB has been posting strong results driven by robust growth in the Indian automobile industry. It remains a key beneficiary of the strong volume growth witnessed in the automobile segment. Exports by the company are also increasing at a strong pace. Implementation of emission norms from FY20 is likely to trigger pre-buying in CVs and boost volume growth. Increasing R&D spend and foray into Defence, Aerospace and Railway segments coupled with fall in interest cost would aid in topline and margin expansion.

We feel investors could BUY the stock at CMP and add on declines to Rs 164-168 band (13x Dec-20E EPS) for sequential targets of Rs 209.5 (16.5x Dec-20E EPS) and Rs 222.5 (17.5x Dec-20E EPS) in three to four quarters. At a CMP of Rs 186, it is trading at ~14.6x Dec-20E EPS.

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Financial Summary YE March (Rs mn) Q3FY19 Q3FY18 YoY (%) Q2FY19 QoQ (%) FY18 FY19E FY20E FY21E Net Sales 2,426.0 2,078.0 16.7 2,510.2 (3.4) 8,551 9,810 10,756 11,842 EBITDA 420.1 404.6 3.8 461.0 (8.9) 1,683 1,878 2,038 2,185 APAT 268.0 212.1 26.4 291.2 (8.0) 907 1,054 1,175 1,254 Diluted EPS (Rs) 2.8 2.2 26.4 3.0 (8.0) 9.4 10.9 12.1 12.9 P/E (x) 19.9 17.1 15.3 14.4 EV / EBITDA (x) 11.7 10.0 9.1 8.3 RoE (%) 26.6 25.1 23.3 21.3

Key Highlights

The implementation of the Bharat Stage VI emission norms from Apr-20 is likely to trigger pre-buying in CVs and in turn raise demand for bearings.

According to Business Wire, the Indian

automotive bearings market is projected to grow at a CAGR of over 13% over FY18-FY25. The AMP 2026 is envisaging growth of 3.5-4x of current output

Make-in-India initiative is attracting

global manufacturers. NRB can leverage its existing relationships with some of them.

NRB’s focus remains more on technology development and has been increasing its R&D spend, the benefit of which is likely to be seen in the coming years.

Debt repayment could bring down finance costs and improve profitability.

(Source: Company, HDFC sec)

Company profile: Founded in 1965, NRB was the first company to manufacture needle roller bearings in India. For over 40 years, NRB has pioneered the leading edge of bearing technology. Today most of the vehicles on Indian roads run on NRB parts. Since its inception, NRB has grown beyond its signature product to offer a wide range of high-precision friction solutions not only in the automotive sector, but across all mobility applications. NRB has plants in Thane, Aurangabad (2 plants), Jalna, Waluj, Hyderabad and Pantnagar.

NRB is known for quality and innovative design in high-precision friction solutions. NRB Bearings is a recognised leader in needle roller bearings, conventional cylindrical roller bearings and has developed a new generation of lightweight drawn cup bearings. It has two Government accredited R&D centers that focus on quality engineering and disruptive technologies which will drive future growth. OEM accounts for 66% of FY18 Revenues Sales mix of domestic revenues

(Source: Company, HDFC Sec)

Export22%

Aftermarket12%

OEM66%

Farm/Off Highway/Ot

hers12%

PV14%

CV28%

2W31%

Others15%

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The NRB group has a market share of ~70% in the needle roller bearings segment. It also has a strong market position in the cylindrical roller bearings segment. The group is a key supplier to prominent automotive OEMs in India. To reduce the impact of cyclical demand from end users (domestic automotive OEMs), the NRB group has focused on increasing revenue from exports and the replacement market. Revenue from OEMs reduced to ~66% of the group's total revenue in FY18 from 74% in FY11. Despite the large proportion of revenue from OEMs, no single customer accounts for more than 10% of the group's revenue.

Installed capacity

(Source: Company, HDFC Sec) NRB’s product range covers over 5500 different types of parts of primarily customized friction solutions. It is one of the three largest suppliers in the world of customized bearings and crank pins to the two and three wheeler industry. For cars and SUVs, it is a significant emerging player in transmission bearings. For high end luxury cars and the small car market, globally, its newest products have found a space in the world’s most highly engineered dual clutch, automated manual and variable speed transmissions. NRB’s largest volume and range of bearings are deep drawn or formed type bearings that are lighter than conventional (solid race) bearings and are often specifically designed for the application. As of FY18, NRB had three subsidiaries viz. SNL Bearings Ltd, NRB Bearings (Thailand) Ltd and NRB Bearings Europe GmbH. SNL Bearings Ltd (SNL), in which NRB holds 73.45% equity, reported PAT of Rs 82.2mn (previous year Rs 66.2mn) on account of higher volumes and helped by lower tax rates. It declared a dividend of Rs 5 per share as compared to Rs 3 per share in FY17. Net sales grew by 14% yoy in FY18 to Rs 383mn. With India’s industrial production displaying a welcome growth revival, supported by the global economic recovery along with the Government’s thrust on rural spending and infrastructure creation, there is optimism that there will be continued growth in the automotive segments during the current year. NRB Bearings (Thailand) Ltd (NRBT), a wholly owned subsidiary, has increased its sales by 22% to THB 193.2mn (Rs 403.3mn) (previous year THB 158.8mn – Rs 303.5mn). The share of manufacturing revenues out of total revenues has increased to THB 130mn (Rs 271.3mn) (previous year THB 115.3mn). Consequently, the Company’s EBITDA has grown from THB 27.8mn to THB 40.9mn (Rs 81.7mn). PAT jumped from THB 4.5mn to THB 15.8mn (Rs 33mn) due to higher manufacturing volumes and lower exchange losses. New business is being finalized with global Japanese customers and manufacturing of new products along with enhanced production of needle rollers, planned during FY 2017-18 will help in further improving the financial results during the coming years.

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NRB Bearings Europe GmbH, a wholly owned subsidiary was set up to support increasing exports to Europe. The Company provides marketing and customer support services. The income during the year is € 208,122 (Rs 15.8mn) and the resultant profit after tax is € 6,725 (Rs 0.5mn). Investment rationale

Implementation of Bharat stage VI emission control norms to trigger pre-buying in CVs in FY20 The Indian Government is all set to introduce Bharat Stage VI emission control norms from April-2020, which is a significant jump from the Bharat Stage IV norms currently under implementation. The implementation of the advanced emission norms would lead to the introduction of advanced technologies. This will ensure pollutants emitted by the vehicles are reduced and comply with the specified limits. This also implies that a number of changes to be made in the engine systems. Over the next one year, companies would have to invest more resources and time to build the requisite capabilities for a successful execution of the programme. The implementation is likely to trigger pre-buying as the prices of vehicles are likely to increase by 10-20% post the implementation. This will in turn raise demand for bearings manufactured by the likes of NRB. India’s Automotive Bearings Market is projected to grow at a CAGR of 13% According to a report by Business Wire, the Indian automotive bearings market is projected to grow at a CAGR of over 13% over FY18-FY25. Some of the major factors contributing to the growth are i) growing automobile industry and increasing vehicle production and sales, ii) expanding fleet size of two-wheelers, passenger cars and three-wheelers and iii) with expanding middle class population and increasing disposable income, automobile sales across all the major automobile segments are expected to grow in the coming years. All these factors will positively impact the automotive bearings market. As per the AMP 2026 (Automotive Mission Plan II), the Indian auto industry will be among the top three in the world by 2026 in terms of engineering, manufacturing and export of vehicles as well as auto components, targeting a growth 3.5 to 4 times its current output.

Readying for electric vehicle challenges NRB is the first Indian component supplier to Audi for engines. Its customers include Daimler for Trucks and Mercedes cars, ZF and Getrag (two of Europe's largest Gearbox manufacturers), Honda and Mazda for cars, and every single Japanese two wheeler manufacturer. The company is looking to invest Rs 1.5bn over the next 2 years to bring out new products and offer customised solutions for its main suppliers. It is also readying itself for hybrid and electric vehicles through its dedicated R&D team. NRB already has a prototype ready and has patent for a product that will significantly reduce weight of bearings. Make-in-India initiative to attract global manufacturers India is among the fastest growing economy in the world and likely to remain so in the coming couple of years. The Government through its ‘Make in India’ initiative has taken measures resulting in sharp improvement in ‘Ease of doing business’ scale for the country. Global OEMs like Daimler, Volvo, Isuzu, Scania and MAN Truck and Bus have entered India and are looking to increase their presence. NRB already has a working relationship with some of these manufacturers which can be leveraged to increase its business further. Also, the manufacturers will have to increase their local sourcing in due course which would again be beneficial to auto component manufacturers. Debt repayment to bring down finance costs Over the last few years the management has been utilising its strong cash flows to pare down its debt levels. Repayment of debt has brought down finance costs from a peak of Rs 206mn in FY13 to Rs 142mn in FY18. Cash flows are expected to remain strong in the coming years and the company is likely to meet its capex requirements from internal accruals while continuing to repay its debt. On a net basis NRB is likely to be debt free by FY21E.

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Falling Interest Costs

(Source: Company, HDFC Sec)

R&D focus to expand market NRB is focusing more on technology development of light weight, fuel efficient, reduced noise bearings with enhanced product life and identification and testing of ‘wear resistant’ tool materials. There is a continuous programme to enhance its range of products and allied parts to meet the future needs of the ever evolving market. NRB aims to be a global player in mobility business by providing multiple solutions for customer requirements. It is looking to foray into railway, defence and aerospace related mobility solutions. The company has been increasing its R&D spend, the benefit of which is likely to be seen in the coming years. R&D expenses have been on a rising trend

(Source: Company, HDFC sec)

Rs mn

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Concerns

Vulnerable to cyclicality in demand from automobile OEMs High dependence of bearing manufacturers on the automobile sector, exposes NRB to cyclicality in demand. In addition, given the capital and technology intensive nature of operations, bearing manufacturers enjoy adequate pricing flexibility with their OEM customers. However, price negotiations happen with a lag, leading to price adjustment delays and consequent impact on profitability in the interim. Export sales are to a large extent dependent on Truck sales trend in America and PV sales trend in the Europe. Threat from spurious / counterfeit products Spurious / Counterfeit products continue to attract price sensitive Replacement Market which accounts for 25-30% of total demand of bearing industry. These supplies, being of inferior quality, are unsafe in use and pose a risk to people, industry and to the economy by way of unexpected downtime and safety hazards. Continuous investment in R&D Regulatory demands on emission levels and improved safety norms would require regular investments in R & D, new technology and even new production facilities to meet these requirements. Raw material price volatility Contracts with OEMs do not have mechanism of automatic raw material price hike pass-through. The companies have to negotiate with OEMs for the same. Raw material costs generally range between 35%-45% of revenue. The major raw material is steel. Forex risk may impact financial performance Exports constitute a significant portion of NRB’s business (~21% of revenue in FY18). The company also imports certain raw materials and spares (~7% of total requirement). Apart from this, the Company has Rs ~417mn debt in foreign currency. Q3FY19 Result Review

NRB reported a strong quarter of growth with sales increasing by 16.7% yoy to Rs 2.43bn while EBITDA margins declined to 17.3% (-210 yoy). However on a sequential basis EBITDA margins improved by 100bps. Revenues were fuelled by strong growth in the 2W segment and robust export sales. EBITDA rose 4% yoy to Rs while the margin contracted, as the benefit of a richer product mix (higher revenue from Needle bearing) was partially offset by an increase in other expenses (higher freight expenses and forex losses~ Rs 50mn). The company reported double digit growth in OEM segments led by decent growth in CV and 2W segment. Product mix was favourable with higher share of needle bearings (~55%). Revenue from exports ramped up (+25/%YoY in 3Q), driven by combined benefits from growth in the truck segment in North America, the PV segment in Europe and appreciation of the Euro. Revenue from other geographies (ASEAN region and Iran) also held up. The company is also looking to expand its capacity through ~Rs 1.50bn capex over FY19-20E.

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(Rs mn) Q2FY19 Q2FY18 YoY-% Q1FY19 QoQ-% Net Sales (incl OOI) 2,426 2,078 16.7 2,510 (3.4) Material Expenses 965 817 18.1 1,031 (6.4) Employee Expenses 310 327 (5.3) 318 (2.5) Other Operating Expenses 731 529 38.1 700 4.4 EBITDA 420 405 3.8 461 (8.9) Depreciation 79 59 33.3 80 (2.2) EBIT 342 346 (1.2) 381 (10.3) Other Income 9 8 12.2 95 (90.3) Interest Cost 34 34 0.3 33 5.8 PBT 316 320 (1.0) 443 (28.5) Tax 49 108 (54.5) 152 (67.7) RPAT 268 212 26.1 291 (8.1) EPS 2.8 2.2 26.4 3.0 (8.0) bps bps EBITDA (%) 17.3 19.5 (215) 18.4 (105) PAT (%) 11.0 10.2 82 11.6 (57)

View and valuation

NRB has been posting strong results driven by robust growth in the Indian automobile industry. It remains a key beneficiary of the strong volume growth witnessed in the automobile segment. Exports by the company are also increasing at a strong pace. Implementation of emission norms from FY20 is likely to trigger pre-buying in CVs and boost volume growth. Increasing R&D spend and foray into Defence, Aerospace and Railway segments coupled with fall in interest cost would aid in topline and margin expansion.

We feel investors could BUY the stock at CMP and add on declines to Rs 164-168 band (13x Dec-20E EPS) for sequential targets of Rs 209.5 (16.5x Dec-20E EPS) and Rs 222.5 (17.5x Dec-20E EPS) in three to four quarters. At a CMP of Rs 186, it is trading at ~14.6x Dec-20E EPS.

Quarterly Financials

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(Rs mn) FY17 FY18 FY19 FY20E FY21E Net Revenues 7,255 8,551 9,810 10,756 11,842 Material Expenses 2,720 3,287 3,978 4,362 4,802 Employee Expenses 1,316 1,449 1,354 1,560 1,776 Other Operating Expenses 1,732 2,132 2,600 2,797 3,079 EBITDA 1,167 1,683 1,878 2,038 2,185 Depreciation 323 310 325 345 404 EBIT 844 1,373 1,553 1,693 1,781 Other Income 80 122 300 142 149 Interest Cost 170 142 127 96 74 PBT 753 1,353 1,727 1,738 1,856 Tax 223 424 484 539 575 Minority Interest 14 22 23 24 27 APAT 517 907 1,219 1,175 1,254 EPS 5.3 9.4 10.9 12.1 12.9

(Rs mn) FY17 FY18 FY19 FY20E FY21E Reported PBT 753 1,353 1,727 1,738 1,856 Non-operating & EO items 165 Interest expenses 170 142 127 96 74 Depreciation 323 310 325 345 404 Working Capital Change (366) 135 280 (190) (249) Tax Paid (223) (424) (484) (539) (575) OPERATING CASH FLOW ( a ) 659 1,515 2,140 1,452 1,511 Capex (326) (408) (650) (850) (500) Free cash flow (FCF) 332 1,107 1,490 602 1,011 Investments 61 83 (144) - - INVESTING CASH FLOW ( b ) (265) (325) (794) (850) (500) Debt Issuance/(Repaid) 208 (564) (150) (300) (300) Interest Expenses (170) (142) (127) (96) (74) FCFE 370 401 1,213 206 637 Share Capital Issuance - - - - - Dividend (165) (242) (366) (352) (376) FINANCING CASH FLOW ( c ) (489) (1,128) (790) (740) (741) NET CASH FLOW (a+b+c) (95) 62 556 (138) 270

Financials: Income Statement

Cash Flow

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(Rs mn) FY17 FY18 FY19 FY20E FY21E EQUITY AND LIABILITIES Share Capital - Equity 194 194 194 194 194 Reserves 2,846 3,586 4,439 5,261 6,139 Total Shareholders Funds 3,040 3,779 4,633 5,455 6,333 Minority Interest 55 77 100 125 152 Long Term Debt 1,073 689 539 389 239 Short Term Debt 1,507 1,327 1,047 897 747 Total Debt 2,580 2,016 1,586 1,286 986 Net Deferred Taxes 36 58 58 58 58 Long Term Provisions & Others 7 0 - - - TOTAL SOURCES OF FUNDS 5,717 5,930 6,377 6,923 7,528 Net Block 2,470 2,596 2,671 2,925 2,921 CWIP 88 148 398 648 748 Investments 61 144 - - - LT Loans & Advances 660 938 781 789 806 Total Non-current Assets 3,278 3,826 3,850 4,363 4,476 Inventories 1,723 1,580 1,895 2,078 2,287 Debtors 1,937 2,334 2,419 2,652 2,952 Other Current Assets 70 75 77 79 81 Cash & Equivalents 225 288 844 706 975 Total Current Assets 3,954 4,278 5,235 5,515 6,296 Creditors 994 1,187 1,260 1,384 1,534 Other Current Liabilities & Provns 521 986 1,448 1,570 1,711 Total Current Liabilities 1,515 2,174 2,708 2,954 3,244 Net Current Assets 2,439 2,104 2,527 2,561 3,052 TOTAL APPLICATION OF FUNDS 5,717 5,930 6,377 6,923 7,528

Balance Sheet

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Particulars FY17 FY18 FY19 FY20E FY21E EPS (Rs) 5.3 9.4 10.9 12.1 12.9 Cash EPS (Rs) 8.7 12.6 15.9 15.7 17.1 BVPS (Rs) 31.4 39.0 47.8 56.3 65.4

PE (x) 34.9 19.9 17.1 15.3 14.4 P/BV (x) 5.9 4.8 3.9 3.3 2.8 Mcap/Sales (x) 2.5 2.1 1.8 1.7 1.5 EV/EBITDA (x) 17.5 11.7 10.0 9.1 8.3

GPM (%) 62.5 61.6 59.4 59.4 59.4 EBITM (%) 16.1 19.7 19.1 18.9 18.4 PATM (%) 7.1 10.6 10.7 10.9 10.6

ROCE (%) 11.1 17.2 18.6 18.7 18.1 RONW (%) 17.7 26.6 25.1 23.3 21.3

Current Ratio (x) 1.6 1.0 0.9 0.9 0.9 Quick Ratio (x) 0.5 0.2 0.2 0.2 0.2 Debt-Equity (x) 0.8 0.5 0.3 0.2 0.2

Debtor days 97.4 99.6 90.0 90.0 91.0 Inventory days 86.7 67.5 70.5 70.5 70.5 Creditor days 50.0 50.7 46.9 47.0 47.3

Key Ratios

Daily Closing Price Chart

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Fundamental Research Analyst: Atul Karwa ([email protected]) HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 3075 3450 Compliance Officer: Binkle R. Oza Email: [email protected] Phone: (022) 3045 3600 SEBI Registration No.: INZ000186937 (NSE, BSE, MSEI, MCX) |NSE Trading Member Code: 11094 | BSE Clearing Number: 393 | MSEI Trading Member Code: 30000 | MCX Member Code: 56015 | AMFI Reg No. ARN -13549, PFRDA Reg. No - POP 04102015, IRDA Corporate Agent Licence No.-HDF2806925/HDF C000222657 , Research Analyst Reg. No. INH000002475, CIN-U67120MH2000PLC152193. Disclosure: I, (Atul Karwa, MMS), authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. 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date: 25th february, 2019 · contributing to the growth are i) growing automobile industry and...

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