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B. Krishnakumar

THE financial performance of SKF India for the year ended December 2004 reflects the buoyant environment that has prevailed in the bearing industry during this period.

Being a market leader, the company has benefited from the upswing in the demand for bearings.

With a presence in both the automobile and industrial bearings market, SKF India has gained from the growth in automobile production and industrial activity. As a result, revenues for the year-ended December 2004 rose 24 per cent to Rs 605 crore.

An impressive feature of the company's performance is the improvement in profitability despite the sharp rise in steel prices.

The price of raw materials, steel in particular, rose sharply in 2004. Despite this, the company's profitability improved to 18.6 per cent from 16.8 per cent.

Quite a few factors have helped SKF India more than offset the impact of raw material price rise.

The shift to valued-added services, the revision in price of bearings and the higher proportion of trading income have helped SKF weather the impact of the input cost rise.

As a strategic move, the company has been focussing on moving up the value chain by launching products and offering customised solutions in the industrial bearings market.

The company has also set up a new division, Application Consultancy and Engineering Services, that would offer complete solutions to industrial users. The buoyancy in the market and a presence in the replacement segment have also helped SKF.

The robust demand helped the industry as bearings producers managed to raise prices to mitigate the impact of steel price hike.

While the interest cost dropped to Rs 0.5 crore (Rs 4.9 crore), the taxation provision rose to Rs 34.3 crore from Rs 20.9 crore.

Helped by the growth in turnover and the improvement in profitability, the post-tax earnings rose 76 per cent to Rs 56.6 crore.

The company's performance is likely to improve as long as the buoyancy in economic growth and industrial activity is sustained. However, though there are no signs of a slowdown in the economic growth or automobile production.

On the positive side, the growing contribution from exports and the shift in focus towards value-added products and services is a positive feature. The technical backing of the Swedish parent lends a competitive edge to SKF India.

Though the company appears well-positioned to withstand a downturn in the bearings industry, the profitability would be under pressure if the firm trend in the price of key inputs were to prevail.

Besides, the slowdown in the automobile industry would also have its repercussions in terms of lower revenue growth and a strain on profitability.

In a recent development, the Swedish parent has announced its decision to delist the company's shares.

The company would be acquiring the shares of SKF India through the reverse book-building process. The floor price for the offer is fixed at Rs 153.

The share price dropped sharply on Thursday on the announcement of the floor price of Rs 153.

Considering that the floor price is significantly lower than the latest closing price of Rs 187, a further decline in price cannot be ruled out.

Going by recent developments, the strong position of the company in the industry and a sizeable institutional holding (14.4 per cent), the bid price is likely to be higher than the floor price of Rs 153.

Investors can reduce exposure and consider fresh buying at levels closer to the floor price, as there would be opportunities to exit at higher levels through the reverse book-building process.

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