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On a Smooth Roll

FAG Bearings is India’s second-largest bearing company. Find out if you should invest in it…

India’s second-largest bearing company finds a mention in this list. FAG Bearings (FAG) saw its earnings increase 18 per cent (y-o-y) while run rate was higher at 22 per cent. In a nondescript industry, FAG earns returns on capital as high as 40 per cent and yes, it is debt-free too.

Rich pedigree: FAG Bearings is part of the $10.7 billion Schaeffler Group engaged in rolling element bearings globally. It is from its parent’s deep product portfolio that FAG draws its strengths and successes.

Significant player in India: Within India, FAG is the second-largest player just behind Bosch with a market share of around 15 per cent. Around 80 per cent of its sales come from the automotive sector and it counts among its clients the who’s who of the Indian automotive sector – Maruti, M&M, Tata Motors, GM, Ford and Daimler Chrysler.

High margins: In an industry flooded by the unorganised sector and cheap imports from China, FAG has been able to earn Ebitda margins of 17 per cent (Q1FY13). According to a report by Motilal Oswal, “given the likely volume growth and control over costs, margins are likely to be maintained over next 3 years.”

Cash rich: As of June 30, 2012, FAG has cash and investments worth Rs 343 crore. That is approximately 13 per cent of the company’s current market cap. This cash rich position puts FAG ahead of its competition.

Slowdown in the auto sector: The company has its share of concerns, the primary of which is the slowdown in the automotive sector. Passenger car sales, according to the latest SIAM (Society of Indian automobile manufacturers) data have slowed down to a growth of 5.5 per cent in July this year. Overall, sales of commercial vehicles too was down – reporting a sub 5 per cent growth. A continued slowdown in the sector could drag down FAG’s performance ahead.

Unorganised and imports headache: Almost half of the Indian bearing industry’s sales come from imports. That combined with the huge number of unorganised players operating in the country are concern areas for OEM manufacturers like FAG. The continued presence of such imports could negatively impact the company’s margins.

Outlook and valuations: FAG is unmistakably at an advantageous position vis-a-vis its peers. Its dominance is likely to continue given its strong parentage. The company has been able to put excellent business to work in a product like bearing, earning 40 per cent return on capital. And it does this by not resorting to any additional debt. At the current market price (CMP) the stock quotes at 13.5 times its TTM earnings and at a 5-year PEG ratio of 0.6. Buy.