3QCY2011 Result Update | Auto Ancillary

October 21, 2011

FAG Bearings
Performance Highlights
Y/E Dec. (` cr) Net sales EBITDA EBITDA margin (%) Reported PAT
Source: Company, Angel Research

ACCUMULATE
CMP Target Price
3QCY10 272 48 17.7 31 % chg (yoy) 22.5 37.5 216bp 44.4 Angel est. 311 59 19.0 40 % diff. 7.2 11.9 83bp 13.2

`1,327 `1,396
12 Months

3QCY11 334 66 19.8 45

Investment Period

Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Auto Ancillary 2,205 0.5 1,435/752 3,449 10 16,786 5,050 FAGB.BO FAG@IN

FAG Bearings (FAG) 3QCY2011 results came in ahead of our expectations even as the automotive and industrial segments witnessed slow activity during the quarter. Results came in above expectations on the revenue and earnings fronts. We revise upwards our earnings estimates to factor in strong operating performance. We maintain our Accumulate view on the stock. Better-than-expected quarterly performance: For 3QCY2011, FAG reported a strong 22.5% yoy (4.5% qoq) increase in revenue to `334cr, above our expectation of `311cr. Revenue performance exceeded estimates in spite of sluggish demand in the automotive and industrial markets. EBITDA margin expanded by 216bp yoy (down 51bp qoq) to 19.8%, largely due to a decline in other expenses. Other expenditure as a percentage of sales declined by 259bp yoy. However, the dip in other expenditure was offset by the depreciation of INR against EUR during the quarter, which led to a 138bp yoy increase in traded goods as a percentage of sales. Net profit grew by a robust 44.4% yoy (1.5% qoq) to `45cr as a result of higher-than-expected operating performance. Further, a steep increase in other income (up 67.5% yoy) and lower tax rate benefitted the companys bottom-line growth. Outlook and valuation: We have a positive view on FAG, considering its strong parentage, debt-free status and cash balance worth `180/share on books. At `1,327, the stock is trading at 11.6x CY2012E earnings. We maintain our Accumulate rating on the stock with a target price of `1,396.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 51.3 22.8 14.0 11.9

Abs. (%) Sensex FAG Bearings

3m 6.1

1yr

3yr 57.1

(9.0) (17.2)

53.2 366.2

Key financials
Y/E Dec. (` cr) Net sales % chg Adj. net profit % chg EBITDA margin (%) Adj. EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

CY2009 820 7.6 73.1 (25.9) 13.6 39.4 33.7 4.8 15.1 20.8 2.4 18.2

CY2010 1,047 27.7 123.1 68.4 17.8 73.1 18.2 3.9 23.5 31.8 1.7 10.3

CY2011E 1,272 21.5 172.6 40.2 19.9 103.8 12.8 3.0 26.4 35.3 1.3 7.1

CY2012E 1,478 16.2 190.2 10.2 18.8 114.4 11.6 2.4 23.1 30.8 1.1 5.9
022-4040 3800 Ext: 344

Yaresh Kothari
022-3935 7800 Ext: 6844 yareshb.kothari@angelbroking.com

Please refer to important disclosures at the end of this report

FAG Bearings | 3QCY2011 Result Update

Exhibit 1: Quarterly performance

Y/E Dec. (` cr) Net sales Consumption of RM (% of sales) Staff costs (% of sales) Purchases of goods (% of sales) Other expenses (% of sales) Total expenditure Operating profit OPM (%) Interest Depreciation Other income PBT (excl. extr. items) Extr. income/(expense) PBT (incl. extr. items) (% of sales) Provision for taxation (% of PBT) Reported PAT PATM (%) Equity capital (cr) EPS (`)
Source: Company, Angel Research

3QCY11 334 101 30.3 25 7.5 91 27.3 50 15.0 267 66 19.8 6 7 67 67 20.1 22 32.4 45 13.6 16.6 27.3

3QCY10 272 86 31.6 20 7.2 71 26.0 48 17.6 224 48 17.7 5 4 47 47 17.3 16 33.4 31 11.5 16.6 18.9

% chg 22.5 17.6 28.7 28.8 4.4 19.3 37.5 29.2 17.0 67.5 42.4 42.4 44.4 44.4

9MCY11 963 300 31.1 74 7.7 244 25.3 151 15.7 768 194 20.2 1 16 20 198 198 20.5 65 32.7 133 13.8 16.6 80.0

9MCY10 782 236 30.2 58 7.4 229 29.3 123 15.7 646 136 17.4 1 15 11 132 132 16.9 44 33.5 88 11.2 16.6 52.8

% chg 23.0 26.8 27.8 6.4 22.9 18.9 42.5 45.2 8.2 83.9 49.8 49.8

51.6

51.6

Strong top-line growth of 22.5% yoy: For 3QCY2011, FAG reported a strong 22.5% yoy (4.5% qoq) increase in its revenue to `334cr, above our expectation of `311cr. Revenue performance exceeded estimates despite sluggish demand in the automotive and industrial markets.

October 21, 2011

FAG Bearings | 3QCY2011 Result Update

Exhibit 2: Better-than-expected net sales growth of 22.5% yoy

(`cr) 400 350 300 250 200 150 100 50 0 (2.6) 21.0 25.2 Net sales (LHS) 34.7 31.5 21.4 30.5 17.1 Net sales growth (RHS) (%) 40 35 30 25 22.520 15 10 5 0 (5)

3QCY09

4QCY09

1QCY10

2QCY10

3QCY10

4QCY10

1QCY11

2QCY11

Source: Company, Angel Research

EBITDA margin expanded by 216bp yoy to 19.8%: FAGs EBITDA margin expanded by 216bp yoy (down 51bp qoq) to 19.8%, largely due to a decline in other expenses. Other expenditure as a percentage of sales declined by 259bp yoy. However, the dip in other expenditure was offset by the depreciation of INR against EUR during the quarter, which led to a 138bp yoy increase in traded goods as a percentage of sales. Led by margin expansion, operating profit grew faster than the top line, recording 37.5% yoy growth (1.8% qoq) to `66cr.

Exhibit 3: EBITDA margin at 19.8%

(%) 70 60 50 40 30 20 10 0 12.5 12.6 15.3 19.1 17.7 19.9 20.5 20.3 19.8 63.4 EBITDA margin Raw material cost/sales

Exhibit 4: Strong net profit growth of 44.4% yoy

(` cr) 50 45 40 35 30 25 20 15 10 5 0 Net profit (LHS) 12.4 8.0 9.5 7.5 11.5 Net profit margin (RHS) 12.7 13.8 14.0 13.6 (%) 16 14 12 10 8 6 4 2 0

64.1

62.0

59.9

58.0

56.0

56.5

56.3

58.2

3QCY09

4QCY09

1QCY10

2QCY10

3QCY10

4QCY10

1QCY11

2QCY11

3QCY11

3QCY09

4QCY09

1QCY10

2QCY10

3QCY10

4QCY10

1QCY11

2QCY11

Source: Company, Angel research

Source: Company, Angel research

Bottom line up 44.4% yoy: Strong top-line growth and expansion in operating margin resulted in net profit growing strongly by 44.4% yoy (1.5% qoq) to `45cr. Further, a steep increase in other income (up 67.5% yoy) and lower tax rate benefitted the bottom-line growth.

October 21, 2011

3QCY11

3QCY11

FAG Bearings | 3QCY2011 Result Update

Investment arguments
Second-largest player with a ~15% market share: FAG is the second-largest player in the Indian bearing industry, with a total market share of ~15%. The company is also a market leader in the spherical roller bearing segment, with a market share of ~55%. FAG is a member of the Schaeffler Group, Germany, a global leader in the rolling element bearing segment and one of the most prominent players in the industry. We believe healthy demand in the auto and industrial segments will aid FAG in registering a CAGR of ~20% in net sales over CY2010-12E. Industry outlook likely to improve on interest rate easing: We believe there is likely to be an uptick in the industrial segment in the next three-four quarters, driven by increased demand from capital goods companies. Also, the auto segment is likely to grow, driven by an 11-12% CAGR in auto sector volumes over FY2011-13E. The company has a strong customer base (such as Maruti, M&M, Tata Motors, GM, Ford and Daimler Chrysler) in this segment. Strong fundamentals: FAGs net asset turnover remains high (~7x in CY2010) due to largely depreciated assets. The companys strong business model enables it to record robust and consistent RoCE of ~30%. Cash flow generation is also expected to remain healthy going forward.

Outlook and valuation

We have a positive view on FAG, considering its strong parentage, debt-free status and cash balance worth `180/share on books. We expect FAG to register a CAGR of ~20% in net sales and ~24% in net profit over CY2010-12E. At `1,327, the stock is trading at 11.6x CY2012E earnings. We maintain our Accumulate rating on the stock with a target price of `1,396.

Key risks
1) Revival in demand in the automotive and industrial segments post easing of interest rates from CY2012 poses an upside risk to our earnings estimates and, therefore, the target price. 2) Adverse currency movement can negatively affect FAGs trading business. 3) Cheap imports from China could affect business of bearing players such as FAG.

Exhibit 5: Key assumptions

Y/E Dec. Ball and roller bearings (mn units) yoy chg (%) Utilisation (%)
Source: Company, Angel Research

CY07 45.3 4.8 96

CY08 46.0 1.5 93

CY09 50.2 9.1 95

CY10 67.2 33.8 135

CY11E 79.1 17.8 132

CY12E 90.1 13.8 134

October 21, 2011

FAG Bearings | 3QCY2011 Result Update

Exhibit 6 : One-year forward P/E band

(`) 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 Share Price (`) 4x 8x 12x 16x

Oct-03

Oct-06

Sep-08

May-04

Nov-09

Dec-04

Aug-05

Source: Company, Bloomberg, Angel research

Exhibit 7: Auto Ancillary Recommendation summary

Company
Amara Raja Automotive Axle^ Bharat Forge* Bosch India# Exide Industries FAG Bearings Subros
#

Reco.
Buy Buy Buy Accumulate Under Review Accumulate Buy Buy

CMP (`)
206 386 258 6,959 119 1,327 179 27

P/E (x) Tgt. price Upside (`) (%) FY12E FY13E

242 450 301 7,501 1,396 208 33
#

Mar-06

EV/EBITDA (x) FY12E

6.1 5.6 7.6 12.6 12.8 7.1 8.5 3.8 5.0 4.9 6.2 10.7 9.2 5.9 7.3 3.2

RoE (%) FY13E

21.1 26.2 18.1 19.0 19.5 23.1 23.1 12.6 22.9 27.6 18.3 20.1 16.3 26.4 21.8 12.4

FY11-13E EPS CAGR (%)

12.9 24.2 26.9 17.1 0.1 25.1 7.9 6.8

FY13E FY12E

17.8 16.5 16.6 7.8 5.2 16.0 20.5

10.6 9.6 15.1 21.1 21.4 12.8 18.8 5.4

^

9.3 8.6 12.9 18.6 15.9 11.6 15.5 5.0

Motherson Sumi*

Source: Company, Angel Research; Note: * Consolidated Results;

December year end;

September year end

October 21, 2011

Feb-11

Oct-11

Jun-07

Jan-08

Apr-09

Jul-10

FAG Bearings | 3QCY2011 Result Update

Profit & loss statement

Y/E Dec. (` cr) Gross sales Less: Excise duty Net Sales Total operating income % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation & Amortisation EBIT % chg (% of Net sales) Interest & other Charges Other Income (% of PBT) Extraordinary (Expense)/Inc. PBT Tax (% of PBT) PAT (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg CY07 726 75 652 652 20.7 510 340 59 52 60 141 19.6 21.7 19 122 22.2 18.7 3 2.3 124 45 36.2 79 80 7.9 12.2 47.9 47.9 7.9 CY08 816 69 762 762 17.0 600 407 59 66 67 162 14.9 21.3 21 142 16.3 18.6 6 4.0 (3) 150 52 34.4 99 96 20.4 12.6 57.6 57.6 20.4 CY09 845 46 820 820 7.6 709 506 63 63 77 111 (31.4) 13.6 20 91 (35.6) 11.1 1 9 8.3 (8) 107 34 31.8 73 66 (31.6) 8.0 39.4 39.4 (31.6) CY10 1,113 74 1,047 1,047 27.7 861 613 73 79 97 186 67.0 17.8 20 166 81.7 15.9 1 17 9.1 (2) 183 60 32.9 123 122 85.5 11.6 73.1 73.1 85.5 CY11E 1,350 90 1,272 1,272 21.5 1,019 718 87 99 116 253 36.1 19.9 22 232 39.5 18.2 2 27 10.5 257 84 32.8 173 173 42.0 13.6 103.8 103.8 42.0 CY12E 1,567 104 1,478 1,478 16.2 1,200 842 103 117 137 278 9.7 18.8 23 255 10.1 17.3 2 30 10.6 283 93 32.8 190 190 10.2 12.9 114.4 114.4 10.2

October 21, 2011

FAG Bearings | 3QCY2011 Result Update

Balance sheet
Y/E Dec. (` cr) SOURCES OF FUNDS Equity Share Capital Reserves & Surplus Shareholders Funds Total Loans Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 363 232 131 11 1.2 300 64 33 203 119 181 325 400 252 148 15 0.3 385 64 48 274 138 247 411 413 272 142 7 0.3 461 173 78 210 143 317 -466 419 278 141 9 0.3 628 288 81 258 201 426 576 451 300 152 9 0.5 798 404 89 305 221 576 737 475 322 153 10 0.6 1,016 552 103 360 263 753 916 17 301 318 7 325 17 388 405 6 411 17 445 462 5 466 17 557 573 3 576 17 718 734 3 737 17 896 913 3 916 CY07 CY08 CY09 CY10 CY11E CY12E

October 21, 2011

FAG Bearings | 3QCY2011 Result Update

Cash flow statement

Y/E Dec. (` cr) Profit before tax Depreciation Change in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations (Inc.)/Dec. in Fixed Assets (Inc.)/Dec. in Investments (Inc.)/Dec. in loans and advances Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balance Closing Cash balance CY07 CY08 124 19 9 25 45 82 (22) 1 5 (15) 8 (23) (15) 52 12 64 150 21 51 111 52 60 (41) 1 (17) 1 (57) 8 (12) (4) (0) 64 64 CY09 107 20 (72) (171) 34 192 (5) (29) 47 14 9 (105) (96) 109 64 173 CY10 CY11E CY12E 183 20 (8) (1) 60 136 (8) (4) 17 5 10 (36) (26) 115 173 288 257 22 26 68 84 153 (33) 1 (32) 12 (17) (5) 116 288 404 283 23 14 82 93 145 (24) (13) (37) 12 30 41 149 404 552

October 21, 2011

FAG Bearings | 3QCY2011 Result Update

Key ratios
Y/E Dec. Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value DuPont Analysis EBIT margin (%) Tax retention ratio (x) Asset turnover (x) RoIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating RoE (%) Returns (%) RoCE (Pre-tax) Angel RoIC (Pre-tax) RoE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT/Interest) (0.2) (0.5) 305.0 (0.2) (0.4) 295.5 (0.4) (1.6) 130.6 (0.5) (1.5) 186.5 (0.6) (1.6) 130.0 (0.6) (2.0) 123.3 1.9 53 53 53 60 2.0 62 52 52 72 2.0 58 50 53 73 2.5 40 42 53 49 2.9 40 43 54 45 3.2 41 44 54 46 42.2 47.2 28.1 38.6 41.1 26.5 20.8 31.4 15.1 31.8 58.0 23.5 35.3 69.9 26.4 30.9 70.6 23.1 18.7 0.6 2.6 31.4 31.4 18.6 0.7 2.5 30.9 30.9 11.1 0.7 2.6 19.6 19.6 15.9 0.7 3.6 38.6 38.6 18.2 0.7 4.1 50.4 50.4 17.3 0.7 4.3 49.5 49.5 47.9 47.9 59.5 4.0 189.9 57.6 57.6 70.0 4.5 242.3 39.4 39.4 56.0 4.5 276.4 73.1 73.1 86.1 5.0 343.7 103.8 103.8 116.9 6.0 440.5 114.4 114.4 128.1 6.0 547.9 27.7 22.3 7.0 0.3 3.0 15.1 6.6 23.0 19.0 5.5 0.3 2.6 13.2 5.2 33.7 23.7 4.8 0.3 2.4 18.2 4.4 18.2 15.4 3.9 0.4 1.7 10.3 3.3 12.8 11.4 3.0 0.5 1.3 7.1 2.4 11.6 10.4 2.4 0.5 1.1 5.9 1.8 CY07 CY08 CY09 CY10 CY11E CY12E

October 21, 2011

FAG Bearings | 3QCY2011 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

FAG Bearing No No No No

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

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

October 21, 2011

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