Equity Research Report on SKF India

1. SKF India
The business of movement
Sector: Engineering and Capital Goods
Industry: Ball Bearings
Current Market Price: 1,388
Market Cap: 7,080 Crores
Manufacturing Plant Location: Pune, Bangalore, Ahmedabad and Hardiwar
Reasons for Bullishness – In Brief
1. Market Leader in Bearings
2. Debt Free Company with large cash on balance sheet
3. Play on cyclical upturn – Auto Sector and uptick in Industrial Production
4. Play on ‘Make in India’ initiative
5. Play on Government’s focus on modernizing and expanding Railways
6. Benefits from growing aftermarket replacement requirement
7. Expanding rapidly
8. Transfer of technological and Global R&D support from the parent company
9. Attractive Valuations
Market Size and Growth
The bearing market size in India is approximately 8500 Crores. Domestic players account for only 53% of this demand
while 45% is met through imports. According to 'India Automotive Bearings Market Forecast & Opportunities, 2020',
the market for automotive bearings in India is forecast increase at a CAGR of around 16% during till 2020.
About the Company
SKF India is an Indian subsidiary of Sweden based SKF Group (53.58% holding) which is a global leader in bearings. SKF is
present in more than 130 countries with employee strength of 48593. SKF India is the largest player in the bearings
industry in India.
Reasons for bullishness
1. Market leader in India
SKF India is a market leader in Indian Bearing
industry. It holds a market share of 28%. The
company has 400 distributors across India with
around 25,000 retail touch points. In 2014, the
company reported net sales of 2372 Crores with PAT
at 202.8 Crores.
The company derives 50% of its revenue from
Industrial segment, 42% from automotive segment
and 8% from exports.
Automotive
segment,
42%
Industrial
segment,
50%
Exports, 8%

2. 2. Debt Free Company with large cash on Balance Sheet
The company is debt free and maintains sufficient cash on its balance sheet (534 Cr). The company does not have
any long term borrowings. The internal cash flows of the company cover the working capital, capex, investments and
dividend payments.
3. Play on cyclical upturn – Auto Sector and uptick in Industrial Production
SKF India can be a good play on economic recovery especially the Auto sector which has been reeling under pressure
for the last 2 years. SKF provides bearings, seals and lubricants to both automotive and industrial requirements and
hence it can be a major beneficiary of industrial pick up and turnaround in auto sales numbers. Some green shoots
are already emerging given the fact that Car sales have spiked in April 2015.
 SKF Automobile clients: Tata Motors, Maruti Suzuki, Toyota, Reiter, Mahindra and Mahindra, Hero MotoCorp,
and Bajaj Auto
 SKF Industrial clients: SAIL, NTPC, Tata Power, BHEL, L&T, GE, Reliance Industries, Cairn, ITC
4. Play on ‘Make in India’ initiative
The company is a major beneficiary of the ‘Make in India’ initiative. With uptick in manufacturing sectors in the
coming years, the company is expected to service several unserved sectors. Focused investment programs in
infrastructure, mining and energy will drive demand for SKF India’s products.
5. Play on Government’s focus on modernizing and expanding Railways
The government’s push for dedicated freight corridor, high speed rail network for both freight and passenger
routes, improved safety for rail networks is expected to increase the spending on products and solutions with
modern technology. SKF India being a market leader in bearings is expected to cater to this demand in the years to
come.
6. Benefits from growing aftermarket replacement requirement
Even though the auto sales numbers had not picked up, the aftermarket replacement requirement for bearings has
kept the sales numbers up for SKF India.
7. Expanding rapidly
SKF produces automobile bearings domestically but majority of the industrial bearings are imported from the parent
company and sold here. However, SKF technologies which is a subsidiary of the parent SKF has recently has set up
plant in Ahmedabad. Currently only 10% of the demand is met through this plant, however more sourcing from this
plant is expected.
The company is also expanding its distributor network for industrial bearings to cater to the replacement demand.
Greater sale of new value-additions, such as energy monitoring service for pumps, StopGo for two-wheelers and
rotor positioning bearings, all of which focus on reducing emissions will also help margin expansion. These products
now account for around 12 per cent of revenue.

3. 8. Transfer of technological and Global R&D support from the parent company
The parent company AB SKF provides global R&D support on the Technology development, product designing,
product engineering, application engineering, testing, advanced engineering solutions and new technologies in
manufacturing. The transfer of new technology helps the company in cost optimization and provides a competitive
advantage in the market.
9. Attractive Valuations
 Relative Valuation:
SKF India is trading at an attractive PE multiple of 35.72 while the Industry PE is 42.83. Its closest competitor is
trading at a PE multiple of 42.62. Hence, currently the stock is available at significant discount to peer and industry
valuations. SKF India is trading at P/BV multiple of 5.17 against 6.15 for FAG Bearings.
PE PB
SKF India 35.72 5.17
Fag Bearings 42.62 6.15
Timken 52.60 10.78
Industry PE 42.83
As on 08/05/2015
 Intrinsic Valuation:
I have done DCF analysis for SKF India Free cash Flows to the Firm. Please find attached excel within the email.
What DCF Says
Enterprise Value (In Crs.) 9,653.95
EV 96,539,484,159.63
Outstanding Shares 52,732,538.00
Value Per Share 1,830.74
CMP 1388.2
Upside 31.9%

4. SKF StockBearing Retail Shop Owner
SKF Product and Price List
Primary Research Conducted at Nagdevi Lane, Mohammed Ali Road, Mumbai
Nagdevi lane near Mohammed Ali Road, Mumbai is famous for all kinds of bearings. I interviewed one of the bearing
retailer regarding SKF Products and Brand.
According to him, SKF is the most sold product in the bearing market. The quality of the product is top notch albeit
with higher pricing. The company also imports products from its offshore production plants. He goes on to say that if
he sells 100 bearing quantity in a day, 50% is SKF products. The company has a wide range of products and ensures
availability on time. The bearing products are sold throughout India majorly to Industrials. When asked about the
slack demand environment in past couple of years, he said that the slack demand has affected all industries and not
just the bearing industry.
 The link for the video is : https://youtu.be/7WepNxgAsJw

5. Visit to the SKF Manufacturing Plant at MIDC area, Chinchwad, Pune
Conclusion
OEM and end users across industrial and automotive sectors were severely impacted by the slowing demand and
challenging economic environment. This had impacted SKF India too. However, the long term prospects for Indian
economy remain bright owing to the demographic dividend which will continue to drive demand from across
industries. Manufacturing industry will be the key driver to cater to this demand given the government’s focus on
making India a global manufacturing hub. Decelerating inflation and monetary easing by RBI can both be positive for
Industrial and automobile production, which means that SKF India can be a major beneficiary. Considering the points
mentioned above along with attractive valuations compared to peers and industry makes SKF India a value buy.