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SKF India Equity Research

HomeCompanySKF India Equity Research

Date of Research – 21 January 2016

Price – Rs. 1175.00

About the Company

SKF India Limited (‘SKF” or the “Company”) was incorporated in the year 1961 as a result of collaboration between AB SKF, Associated Bearing Company limited and Investment Corporation of India Ltd and the first manufacturing plant was commissioned in Pune in the year 1965. The Company manufactures and supplies products, solutions, and services in the area of rolling bearings, seals, and lubrication systems primarily in India.

The Company’s products include low friction engine seals, weight hub bearing units, deep groove ball bearing, hydraulic seals, self-aligning roller bearings, linear actuator systems. SKF operates with 3 manufacturing facilities located in Pune, Bangalore and Haridwar, with 11 sales offices across India and a supplier network of over 300 distributors.

*Earlier Financial Year was from Jan to Dec. For FY 2016, the Company announced results for the Fifteen Months ended March 31, 2016 i.e. from January 2015 to March 2016.

Key Financial Figures

Standalone (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2016 FY 2017
Total Income from Operations 2,227.59 2,274.96 2,415.60 2,997.93  2,835.54 
Expenses 1,969.19 2,013.56 2,132.41 2,633.99   2,499.39  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 258.40 261.40 283.19 363.94   336.15  
Depreciation 43.59 49.44 53.95 68.43   47.88 
Finance Costs –  – 
Other income 68.32 63.17 76.93 100.90   87.33 
Exceptional items 22.10 –  0.04 
PBT 283.13 253.03 306.17 396.41   375.56  
Tax 93.05 86.31 103.40 139.26   131.71 
PAT (before Minority Interest and share of Associates) 190.08 166.72 202.77 257.15   243.85  

Profitability Analysis

Standalone (%)
Particulars FY 2012 FY 2013 FY 2014 FY 2016 FY 2017
Operating Profit Margin Ratio 11.60 11.49 11.72 12.14   11.85 
Net Profit Margin Ratio 8.53 7.33 8.39 8.58   8.60

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2011 FY 2012 FY 2013 FY 2014 FY 2016 
Share Capital 52.73 52.73 52.73 52.73 52.73 
Reserves & Surplus 958.51 1,102.63 1,222.77 1,363.45 1,516.66 
Net worth (shareholders funds) 1,011.24 1,155.36 1,275.50 1,416.18 1,569.39 
Long term borrowings 4.03 – 
Current liabilities 495.19 417.09 395.81 467.87 486.69 
Other long term liabilities and provisions 19.25 17.54 27.02 27.47 
Deferred Tax Liabilities 1.60 8.35 0.08 – 
Total Liabilities 1,508.03 1,600.05 1,692.88 1,911.15 2,083.55 

 

Application of Funds / Assets (Rs. Cr)
Particulars FY 2011 FY 2012 FY 2013 FY 2014 FY 2016 
Fixed Assets 361.88 650.48 401.06 384.98 309.79 
Noncurrent Investments 196.3 18.92
Current assets 1,146.15 949.57 1,042.30 1,294.15 1,547.77
Long term advances and other noncurrent assets 249.52 232.02 198.47 
Deferred Tax Assets 8.60 
Total assets 1,508.03 1,600.05 1,692.88 1,911.15 2,083.55 

Efficiency Analysis

 
Particulars FY 2011 FY 2012 FY 2013 FY 2014 FY 2016 
ROCE 30.10 22.37 20.43 20.00 23.19 
ROE / RONW 20.62 16.45 13.07 14.32  16.39

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Standalone
Particulars FY 2012 FY 2013 FY 2014 FY 2016 FY 2017
Total Income from Operations (Rs. Cr.) 2,227.59 2,274.96 2,415.60 2,997.93  2,835.54 
Growth (%) (8.72%) 2.13 % 6.18 % 24.11 %  (5.42 %) 
PAT (Rs. Cr.) 190.08 166.72 202.77 257.15   243.85  
Growth (%) (8.83%) (12.29 %) 21.62 % 26.82 %  (5.17 %)
Earnings Per Share – Basic (Rs. ) 36.00 31.60 38.50 48.80  46.30 
Earning Per Share – Diluted (Rs. ) 36.00 31.60 38.50 48.80  46.30 
Price to Earnings 17.69 25.62 38.31 25.53  34.23 

Dividend History

The Company has maintained an average dividend yield of 1.03% over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. SKF’s average current ratio over the last 5 financial years has been 2.44 times which indicates that the Company is comfortably placed to pay for its short term obligations.

Long term Debt to Equity Ratio

Companies operating with high long term debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

SKF’s average long term debt to equity ratio over the last 5 financial years has been 0.00 times which indicates that the Company operates with zero debt and is placed well to withstand economic slowdowns.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Since SKF operates with zero level of debt, average interest coverage ratio is not applicable for the Company.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, SKF reported a promoter holding of 53.58 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 32.36 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

 

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