NRB Bearings Ltd. - Company Valuation and Investment Recommendation
Valuation recommendation and key investmentconsiderationsRecommendation: BUY Analysis from both intrinsic valuation and relative valuation highlight that at current levels NRB Bearings offers asignificant upsideKey investment highlights: #4 bearings manufacturer in the organized bearings market Market leader in needle roller bearings with ~70% market share Continued high investment to support organic growth Increasing focus on exports market (high margin business) and industrial components market (currently comprisesprimarily of imports) Attractive industry growth estimates (as per ACMA):o Auto Components industry growth CAGR 2011-21: 11.0%o Auto Components industry exports growth CAGR 2011-21: 18.8%Key investment concerns Rising raw material costs, which may put some pressure on the margins in the short-term Exposure to foreign currency risks Significant employee costs as compared to peers2
Industry overview3 Indian organized ball bearings sector worth INR 45 billionand has seen healthy growtho The sector increased by 13% for the year 2011-12 Domestic industry satisfies 75% of the demand, the balance25% is met through importso International manufacturers have established units inIndia through joint ventures or 100% ownershipIndustry overviewGrowth in key drivers of the sector Industry structureBearingsindustryUnorganized ImportedOrganized~37.5% ~37.5% ~25% Historically buoyant growth witnessed in the automotiveindustry, the largest consumer of quality bearings, across allsegmentso Indian government’s Automotive Mission Plan 2016 tofacilitate high growth for the sectoro Targets of doubling of the automotive industriescontribution to the Indian economy between 2006-2016 Infrastructure spending in the 12th Five Year Plan expectedto double to US$ 1 trillion Investments in roads, railways and power generation willresult in a multiplier effect across the core sectorsKey sector highlightsReplacementSpecial purposebearingOEMCAGR CAGR2008-12 2012-21Passenger vehicles growth 14.0% 13.0%Commercial vehicles 22.0% 11.0%Tractors NA 6.0%Two & three wheelers 16.0% 7.0%Construction vehicles NA 14.6%CAGR CAGR2007-11 2011-21Auto components 14.6% 11.0%Auto components - Exports 11.0% 18.8%
NRB70.0%Others30.0%Auto79.0%Industrial6.9%Exports14.1%OEM66.9%After-market19.0%Exports14.1%NRB Bearings - Company profile NRB operates in the ball and roller bearing business Offers c.3,000 customized products to its diversified clientbase in the Auto OEM’s and after market segments Products find applications in Auto, tractors & farmequipments & Off highway vehicles Customers: Well-established relationships with some majorOEMs with top five customers including Tata Motors, HeroHonda, Ashok Leyland, M&M, and Bajaj Autoo Diversified client base with no single customeraccounting for >10% revenueso Global clientele includes Daimler, Volvo and VW4Company overview Sales breakdown (FY2011/12)Market positioning OrganizationNRB BearingsNRB IndustrialBearings(NIBL)NRB Bearings(Thailand)SNL Bearings73.5% 100% 100%NRB12.0%Others88.0%Mkt. share of organizedbearings industryMkt. share of needleroller bearings
NRB Bearings - Company profile (cont’d)Industrial bearings NRB incorporated NIBL in February’ 2011 to manufacturebearings for the industrial sector NIBL is expected to commence manufacturing industrialbearings from October, 2012 NRB to also transfer its industrial bearings operations toNIBL Company’s new plant in Aurangabad to cater its industrialsegment is expected to go on-stream and start contributingslowly from current fiscal NRB expects to increase its industrial bearings market sharein the next 2-3 years through new plantExports Company plans to focus more on the exports Revenue contribution from exports expected to increase to20% over the next 2-3 years5 Operates 8 manufacturing plants (7 domestic and 1 inThailand)Recent developments Manufacturing footprint and locationsLocation Year Products manufacturedThane 1966Textile bearing, Thrust bearing, steering bearing, Needlebushes, Needle cagesAurangabad 1978 Needle rollersJalna 1982Rocker arm bearings, Textile bearings, Taper rollerbearings, Ball bearings, Sperical and Cylinderical ballbearingsRanchi 1983Needle rollers, Needle cages, Full compliment shellbearingsWaluj 1991Big and small end bearings, Grease retained bushes, Fullcomplimented bushesHyderabad 1992 Thrust bearings, on rod kits, CagesPantnagar 2008Ball bearings, Needle roller bearings, Cylindrical rollerbearingsThailand 2007Spherical bearings, Tapered bearings, Cylindrical rollerbearings , Needle cages, Roller cages
NRB Bearings – Valuation summary852.3471.7074.9340.2451.8572.7784.1890.5454.5370.71DCF valuationEV / EBITDA 2012EEV / EBITDA 2013EP / E 2012EP / E 2013EValuation rangeCurrent share price:INR 37.801. P / E 2013E valuation based on range of +/- 1.5x the average multiple of 9.7x for the peer group.2. P / E 2012E valuation based on range of +/- 1.5x the average multiple of 10.0x for the peer group.3. EV / EBITDA 2013E valuation based on range of +/- 0.5x the average multiple of 6.6x for the peer group.4. EV / EBITDA 2012E valuation based on range of +/- 1.5x the average multiple of 7.9x for the peer group.5. DCF valuation low price based on WACC of 12.0% and terminal growth rate of 3.0%; high price based on industrial growth rate of 8.0% andterminal growth rate of 5.0%.