Stock Market Result Update on FAG Bearings for 3QCY2011

Stock Market Result Update on FAG Bearings for 3QCY2011 with an Accumulate recommendation and a Target Price of `1396 (12 months).

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 company’s 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.