FAG Bearing

2QCY2010 Result Update | Auto Ancillary
July 23, 2010

FAG Bearing BUY
CMP Rs760
Performance Highlights Target Price Rs931
Y/E Dec (Rs cr) 2QCY10 2QCY09 % chg (yoy) Angel est. % Diff Investment Period 12 Months
Net sales 273 202 34.7 244 11.9 S tock Info
Operating profit 52 31 66.3 37 42.1 S ector Auto Ancillary
EBITDA (%) 19 15 364bp 16 363bp Market Cap (R s cr) 1,263
Reported PAT 34 19 81.6 22 53.3 Beta 0.4
Source: Company, Angel Research 52 Week High / L ow 777/401
FAG Bearing (FAG) recorded strong 2QCY2011 performance. Top-line beat our Avg. Daily Volume 3,660
estimates on account of the robust performance registered by the auto and Face Value (R s ) 10
industrial segments. Operating performance improved substantially on better BS E S ens ex 18,131
operating leverage. Net profit surged on better operating performance, lower tax Nifty 5,449
rate and higher other income. We have revised our estimates upward: 1)~9% R euters Code FAGB.BO
upward revision in revenue factoring in robust top-line growth in 2QCY2010, 2) Bloomberg Code FAG@IN
higher OPM on better operating leverage, and 3) ~30% revision in earnings.

Quarterly performance beats estimates: For 2QCY2010, net sales grew 34.7% S hareholding P attern (% )
yoy to Rs273cr (Rs202cr) exceeding our expectation of Rs244cr. This was largely P romoters 51.3
driven by the substantial jump in overall auto volumes and sharp recovery in the MF / Banks / Indian Fls 22.8
industrial bearings segment. EBITDA margin expanded by a significant 364bp yoy FII / NR Is / OCBs 14.3
to 19.1% (15.5%) basically due to decrease in raw material costs by 560bp
Indian P ublic / Others 11.6
during the quarter and better operating leverage. Bottom-line spiked 81.6% yoy
to Rs33.8cr (Rs18.6cr) on robust top-line growth and improvement in operating
performance. Higher other income and lower tax rate also aided net profit Abs . (% ) 3m 1yr 3yr
growth, which helped FAG register NPM of 12.4% (9.2%).
S ens ex 2.5 19.0 15.2
FAG Bearing 26.7 80.3 14.9
Outlook and Valuation: The stock is currently trading at 10.7x CY2010E and 9.8x
CY2011E EPS. At our Target multiple of 12x, we have arrived at a Target Price of
Rs931. Further, FAG scores well over its peers and we believe that it is a good
long-term investment pick, in view of its strong fundamentals. We maintain a Buy
rating on the stock.

Key Financials
Y/E Dec (Rs cr) CY2008 CY2009 CY2010E CY2011E
Net sales 762 820 1,049 1,185
% chg 17.0 7.6 27.9 12.9
Adj. net profit 98.6 73.1 117.8 129.0
% chg 24.3 (25.9) 61.2 9.4
OPM (%) 21.3 13.6 18.3 18.0
Adj. EPS (Rs) 57.6 39.4 70.9 77.6
P/E (x) 13.2 19.3 10.7 9.8 Vaishali Jajoo
P/BV (x) 3.1 2.7 2.2 1.9 022-4040 3800 Ext: 344
RoE (%) 26.5 15.1 22.9 20.6 vaishali.jajoo@angeltrade.com
RoCE (%) 38.6 20.8 32.6 29.7
Yaresh Kothari
EV/Sales (x) 1.5 1.3 0.9 0.8
022-4040 3800 Ext: 313
EV/EBITDA (x) 7.4 9.8 5.4 4.6 yareshb.kothari@angeltrade.com
Source: Company, Angel Research

Please refer to important disclosures at the end of this report 1

FAG Bearing | 2QCY2010 Result Update

Exhibit 1: Quarterly performance
Y/E Dec (Rs cr) 2QCY10 2QCY09 % chg 1HCY10 1HCY09 % chg
Net sales 272.6 202.4 34.7 510.0 392.1 30.1
Consumption of RM 85.5 77.4 10.5 150.4 145.0 3.8
(% of sales) 31.4 38.2 29.5 37.0
Staff costs 21.4 16.4 29.9 38.3 31.5 21.9
(% of sales) 7.8 8.1 7.5 8.0
Purchases of goods 76.9 50.3 52.7 158.3 93.1 70.1
(% of sales) 28.2 24.9 31.0 23.7
Other expenses 36.7 26.9 36.4 74.6 54.5 37.1
(% of sales) 13.5 13.3 17.6 14.6 13.9
Total expenditure 220.5 171.1 28.9 421.6 323.9 30.2
Operating profit 52.2 31.4 66.3 88.4 68.2 29.6
OPM (%) 19.1 15.5 17.3 17.4
Interest 0.2 0.2 31.3 0.4 0.3 40.7
Depreciation 5.1 4.9 3.7 10.1 9.8 2.9
Other income 3.9 2.3 65.0 6.8 3.5 94.5
PBT (excl. extr. Items) 50.7 28.7 77.1 84.7 61.6 37.4
Extr. income/(expense) - - - - 11.5 -
PBT (incl. extr. items) 50.7 28.7 77.1 84.7 50.1 69.0
(% of sales) 18.6 14.2 16.6 12.8
Provision for taxation 16.9 10.0 28.4 17.6
(% of PBT) 33.3 35.0 33.5 35.0
Reported PAT 33.8 18.6 81.6 56.3 32.6 73.0
PATM (%) 12.4 9.2 11.0 8.3
Equity capital (cr) 16.6 16.6 16.6 16.6
EPS (Rs) 20.4 11.2 81.6 33.9 19.6 73.0

Top-line surges on robust auto growth and increase in industrial segment: For
2QCY2010, the company’s net sales grew 34.7% yoy to Rs273cr (Rs202cr) above
our expectation of Rs244cr. This was largely driven by a substantial jump in overall
auto volumes and sharp recovery in the industrial bearing segment. Overall pickup
in economic activities helped the company to clock robust top-line growth. The
company is operating at almost 100% utilisation levels, which poses a risk of
capacity constraints going forward if demand continues to be strong.

July 23, 2010 2


Exhibit 2 : Net sales up 35%, beats estimates

(Rs cr) (%)
300 50

225 34.7 35
30.0

150 20
13.1

75 5
(2.6) 1.4

0 (10)
2QCY09 3QCY09 4QCY09 1QCY10 2QCY10

Net Sales (LHS) Net Sales Growth (RHS)

Source: Company, Angel research

EBITDA margins up by 364bp on lower input cost: EBITDA margin expanded by a
substantial 364bp yoy to 19.1% (15.5%) basically due to decrease in raw material
costs by 560bp during the quarter. Further, better operating leverage helped 29bp
yoy reduction in staff costs during the quarter. Other expenses, however, increased
marginally by 18b yoy to 13.5%. Overall, operating profit increased substantially
by 66.3% to Rs52cr (Rs31cr), beating our expectation by 42%.

Exhibit 3: EBITDA margin at 19%, ahead of estimates Exhibit 4: Robust net profit growth of 82%
(%) (Rs cr) (%)
80 40 15
65.5 12.5
63.4 64.1 62.0 59.9
60 30 9.6 9.5
8.1 10
7.6
40 20
19.1
15.5 15.3 5
20 12.5 11.2 10

0
0 0
EBITDA Margin Raw Material Cost/Sales Net Profit (LHS) Net Profit Margin (RHS)

Source: Company, Angel Research Source: Company, Angel Research

Bottom-line up 81.6%, beats estimates: For 2QCY2010, FAG registered 81.6% yoy
increase in bottom-line to Rs33.8cr (Rs18.6cr) largely on account of robust top-line
growth and substantial jump in operating performance. Further, higher other
income and lower tax rate aided the robust growth in net profit to a certain extent
and helped the company to register NPM of 12.5% (9.6%).

July 23, 2010 3


Investment Arguments

Industry outlook encouraging: In a developing economy like India, with a
greater focus on mechanisation of the manufacturing process, the demand for
bearings is expected to outperform industrial growth. Consequently, the
industrial segment (which accounts for almost 50% of the Indian bearings
market) offers immense growth opportunity for the bearings industry.
Moreover, the bearings segment has a direct correlation with the auto sector
growth, which is expected to record CAGR of 16-17% over the next couple of
years.

Strong support from parent company: FAG India is a group company of FAG
Kugelfischer George Schaefer AG. The parent manufactures bearings for
automotive and industrial applications. FAG India is a preferred supplier of
bearing systems to some of the leading manufacturers of cars and trucks like
Maruti, M&M, Tata Motors, GM, Ford and Daimler Chrysler. Notably, with the
global players looking at enhancing their capacities in India, FAG can enjoy
an edge over its peers to supply to these OEMs in India.

Up-cycle valuation for robust earnings CAGR: The recovery in auto demand
will aid the company in registering a CAGR of around 20% in net sales and
33% in net profit over CY2009-11E. At the CMP of Rs760, the stock is trading
at 9.8x CY2011E earnings of Rs77.6. We believe that robust growth in the
auto segment and recovery in the industry cycle will help the company to clock
higher returns and stock in catching up with its historical valuations.

Outlook and Valuation

We have revised our estimates upward: 1) ~9% upward revision in revenue to
account of robust top-line growth in 2QCY2010, 2) higher OPM on better
operating leverage, and 3) ~30% revision in earnings

Exhibit 5: Change in estimates
Y/E Dec Earlier estimates Revised estimates % chg
CY10E CY11E CY10E CY11E CY10E CY11E
Net sales (Rs cr) 959 1,084 1,049 1,185 9.4 9.3
OPM (%) 15.0 15.4 18.3 18.0 325 265
EPS (Rs) 51.3 59.4 70.9 77.6 38 31
Source: Angel Research

The stock is currently trading at 10.7x CY2010E and 9.8x CY2011E EPS. At our
Target multiple of 12x, we have arrived at a Target Price of Rs931. Further, FAG
scores well over its peers and we believe that it is a good long-term investment
pick, in view of its strong fundamentals. We maintain a Buy rating on the stock.

July 23, 2010 4


Exhibit 6: Key Assumptions
Y/E Dec CY06 CY07 CY08 CY09 CY10E CY11E
Ball & Roller Bearings (mn units) 43.2 45.3 46.0 49.3 61.6 67.7
yoy ch (%) 34.1 4.8 1.5 7.1 25.0 10.0
Utilization (%) 102 96 93 94 103 98

Exhibit 7 : One-year forward P/E band
(Rs) Share Price (Rs) 4x 7x 10x 13x
1,200

900

600

300

0
Oct-03

Apr-04

Oct-04

Apr-05

Oct-05

Nov-06

Nov-07

Dec-08

Dec-09
Jun-08

Jun-09

Jul-10
May-06

Source: Company, Angel research, Bloomberg May-07

Exhibit 8: Auto Ancillary - Recommendation summary
CMP Tgt Price Upside P/E (x) EV/EBITDA (x) RoE (%) CY09-11E EPS
Company Reco.
(Rs) (Rs) (%) FY11E FY12E FY11E FY12E FY11E FY12E CAGR (%)
^
Automotive Axle Buy 496 578 16.6 15.2 12.9 7.4 6.3 25.9 25.9 145.5
Bharat Forge* & ~ Under Review 331 - - 27.6 14.8 11.2 9.8 16.3 18.9 -
#
Bosch India Neutral 5,737 - - 24.1 20.4 17.0 12.5 20.8 20.1 26.7
Exide Industries Accumulate 134 153 14.3 15.7 13.4 9.2 8.0 28.7 26.5 25.8
FAG Bearings# Buy 760 931 22.5 10.7 9.8 5.4 4.6 22.9 20.6 40.3
Motherson Sumi* Neutral 166 - - 18.4 14.9 6.9 6.0 27.7 29.7 33.4
Subros Buy 51 60 18.7 9.7 8.4 4.4 3.3 14.7 15.2 14.1
# ^ &
Source: Company, Angel Research; Note: * Consolidated Results; December Year end; September Year end; FY11E and FY12E EPS adjusted for
FCCB interest after tax; ~ Earnings estimates are under review

July 23, 2010 5


Profit & Loss Statement
Y/E Dec (Rs cr) CY06 CY07 CY08 CY09 CY10E CY11E
Gross sales 612.3 726.4 815.5 845.5 1,109.7 1,257.2
Less: Excise duty 72.6 74.9 69.2 46.1 88.8 100.6
Net Sales 539.6 651.5 762.0 820.3 1,048.9 1,184.7
Total operating income 539.6 651.5 762.0 820.3 1,048.9 1,184.7
% chg - 20.7 17.0 7.6 27.9 12.9
Total Expenditure 421.5 510.2 599.6 708.8 857.5 971.4
Net Raw Materials 281.7 340.0 407.5 505.8 629.3 710.8
Other Mfg costs 45.1 58.7 59.3 63.3 78.7 88.8
Personnel 41.3 51.6 65.9 63.0 73.4 77.0
Other 53.3 59.9 66.9 76.7 76.0 94.8
EBITDA 118.1 141.3 162.4 111.5 191.4 213.2
% chg - 19.6 14.9 (31.4) 71.7 11.4
(% of Net Sales) 21.9 21.7 21.3 13.6 18.3 18.0
Depreciation & Amortisation 18.3 19.4 20.6 20.1 22.8 27.0
EBIT 99.8 122.0 141.9 91.4 168.6 186.2
% chg 22.2 16.3 (35.6) 84.5 10.4
(% of Net Sales) 18.5 18.7 18.6 11.1 16.1 15.7
Interest & other Charges 2.7 0.4 0.5 0.7 1.0 1.2
Other Income 12.3 2.9 6.0 8.9 9.6 10.4
(% of PBT) 11.2 2.3 4.0 8.3 5.4 5.3
Extraordinary (Expense)/Inc. 0.0 0.2 (2.9) (7.6) 0.0 0.0
PBT 109.5 124.3 150.3 107.1 177.2 195.4
Tax 35.8 45.0 51.6 34.0 59.4 66.4
(% of PBT) 32.7 36.2 34.4 31.8 33.5 34.0
PAT (reported) 73.7 79.4 98.6 73.1 117.8 129.0
PAT after MI (reported) 73.7 79.4 98.6 73.1 117.8 129.0
ADJ. PAT 73.7 79.5 95.7 65.5 117.8 129.0
% chg - 7.9 20.4 (31.5) 79.8 9.4
(% of Net Sales) 13.7 12.2 12.6 8.0 11.2 10.9
Basic EPS (Rs) 44.3 47.9 57.6 39.4 70.9 77.6
Fully Diluted EPS (Rs) 44.3 47.9 57.6 39.4 70.9 77.6
% chg - 7.9 20.4 (31.5) 79.8 9.4

July 23, 2010 6


Balance Sheet
SOURCES OF FUNDS
Equity Share Capital 16.6 16.6 16.6 16.6 16.6 16.6
Preference Capital - - - - - -
Reserves & Surplus 231.0 301.5 388.4 445.1 551.3 666.6
Shareholders’ Funds 247.6 318.1 405.0 461.7 567.9 683.2
Total Loans - - - - - -
Deferred Tax Liability 5.2 6.6 5.8 4.5 1.9 (0.1)
Total Liabilities 252.8 324.7 410.8 466.3 569.7 683.1
APPLICATION OF FUNDS
Gross Block 324.6 363.1 400.2 413.2 456.0 515.1
Less: Acc. Depreciation 213.4 231.8 251.8 271.6 294.4 321.4
Net Block 111.2 131.2 148.4 141.6 161.6 193.6
Capital Work-in-Progress 28.0 11.1 15.1 6.8 13.7 15.5
Goodwill - - - - - -
Investments 2.7 1.2 0.3 0.3 5.7 6.8
Current Assets 215.6 299.9 385.4 460.9 577.0 680.2
Cash 12.3 63.9 63.6 173.1 225.5 273.3
Loans & Advances 25.6 33.0 48.1 78.2 57.7 65.2
Other 177.7 203.0 273.8 209.6 293.8 341.7
Current liabilities 104.6 118.7 138.4 143.5 188.3 213.0
Net Current Assets 111.0 181.2 247.0 317.5 388.7 467.2
Mis. Exp. not written off - - - - - -
Total Assets 252.8 324.7 410.8 466.3 569.7 683.1

July 23, 2010 7


Cash Flow Statement
Profit before tax 109.5 124.3 150.3 107.1 177.2 195.4
Depreciation 18.3 19.4 20.6 20.1 22.8 27.0
Change in Working Capital 18.7 8.6 51.4 (71.8) 50.4 24.6
Less: Other income 67.7 25.2 110.5 (170.8) 99.1 53.9
Direct taxes paid 35.8 45.0 51.6 34.0 59.4 66.4
Cash Flow from Operations 43.0 82.1 60.1 192.1 91.9 126.7
(Inc.)/Dec. in Fixed Assets (46.7) (21.5) (41.2) (4.8) (49.7) (60.8)
(Inc.)/Dec. in Investments 0.1 1.4 0.9 0.0 (5.4) (1.1)
(Inc.)/Dec. in loans and advances (0.1) 0.1 (17.1) (28.8) 23.4 (6.1)
Other income 0.8 4.9 0.6 47.3 0.0 0.0
Cash Flow from Investing (45.9) (15.1) (56.8) 13.8 (31.7) (68.0)
Issue of Equity - - - - - -
Inc./(Dec.) in loans (11.2) - - - - -
Dividend Paid (Incl. Tax) 6.7 7.6 8.0 8.8 8.8 11.7
Others 0.4 0.2 (0.2) (0.0) - -
Cash Flow from Financing 7.2 (15.4) (3.6) (96.3) (7.8) (10.9)
Inc./(Dec.) in Cash 4.3 51.6 (0.4) 109.5 52.4 47.8
Opening Cash balance 8.0 12.3 63.9 63.6 173.1 225.5
Closing Cash balance 12.3 63.9 63.6 173.1 225.5 273.3

July 23, 2010 8


Key Ratios
Y/E Dec CY06 CY07 CY08 CY09 CY10E CY11E
Valuation Ratio (x)
P/E (on FDEPS) 17.1 15.9 13.2 19.3 10.7 9.8
P/CEPS 13.7 12.8 10.9 13.6 9.0 8.1
P/BV 5.2 4.0 3.1 2.7 2.2 1.9
Dividend yield (%) 0.5 0.5 0.6 0.6 0.8 0.9
EV/Sales 2.0 1.7 1.5 1.3 0.9 0.8
EV/EBITDA 10.6 8.5 7.4 9.8 5.4 4.6
EV / Total Assets 4.9 3.7 2.9 2.3 1.8 1.4
Per Share Data (Rs)
EPS (Basic) 44.3 47.9 57.6 39.4 70.9 77.6
EPS (fully diluted) 44.3 47.9 57.6 39.4 70.9 77.6
Cash EPS 55.4 59.5 70.0 56.1 84.6 93.9
DPS 4.0 4.0 4.5 4.5 6.0 7.0
Book Value 147.5 189.9 242.3 276.4 340.3 409.7
DuPont Analysis
EBIT margin (%) 18.5 18.7 18.6 11.1 16.1 15.7
Tax retention ratio (x) 0.7 0.6 0.7 0.7 0.7 0.7
Asset turnover (x) 2.3 2.6 2.5 2.6 3.3 3.2
RoIC (Post-tax) 28.2 31.4 30.9 19.6 35.4 32.8
Cost of Debt (Post Tax) - - - - - -
Leverage (x) - - - - - -
Operating RoE (%) 28.2 31.4 30.9 19.6 35.4 32.8
Returns (%)
RoCE (Pre-tax) 39.5 42.2 38.6 20.8 32.6 29.7
Angel RoIC (Pre-tax) 41.9 47.2 41.1 31.4 49.3 45.7
RoE 29.8 28.1 26.5 15.1 22.9 20.6
Turnover ratios (x)
Asset Turnover (Gross Block) 1.7 1.9 2.0 2.0 2.4 2.4
Inventory / Sales (days) 54.6 53.3 61.7 57.9 45.8 53.4
Receivables (days) 51.2 53.4 52.5 49.7 45.6 48.7
Payables (days) 52.1 53.2 52.3 53.4 49.8 53.5
WC cycle (ex-cash) (days) 66.7 60.5 72.0 72.9 53.5 55.0
Solvency ratios (x)
Net debt to equity (0.1) (0.2) (0.2) (0.4) (0.4) (0.4)
Net debt to EBITDA (0.1) (0.5) (0.4) (1.6) (1.2) (1.3)
Interest Coverage (EBIT/Interest) 37.5 305.0 295.5 130.6 160.8 157.2

July 23, 2010 9


Research Team Tel: 022 - 4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment
decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make
such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies
referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and
risks of such an investment.

Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make
investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this
document are those of the analyst, and the company may or may not subscribe to all the views expressed within.

Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and
trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's
fundamentals.

The information in this document has been printed on the basis of publicly available information, internal data and other reliable
sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this
document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way
responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report.
Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify,
nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While
Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory,
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This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced,
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Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or
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Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please
refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and
its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement FAG Bearing
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock No
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No

Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors.

Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
Reduce (-5% to 15%) Sell (< -15%)

July 23, 2010 10

FAG Bearing

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