The Hindu Business Line : Fag Bearings: Buy

LONG-term investors may consider equity exposure in Fag Bearings at prevailing levels. The technical backing of a global major, the growth in exports and the strong fundamentals make Fag Bearings a preferred portfolio candidate from the bearings industry. The stock has appreciated by about 50 per cent the past few months.

The company is a major player in the bearings market, with a strong presence in the ball bearings segment. Its product portfolio also includes cylindrical roller and spherical roller bearings. The company derives close to 65 per cent of its earnings from the ball bearings market which is highly competitive.

Fag Bearings has exposure to almost all major user industries including automobile, engineering and railways. Helped by robust growth from both automobile and engineering sector, the company has posted a steady growth in earnings in recent years.

For the year ended December 2004, the turnover increased by 21 per cent to Rs 323 crore and the post-tax earnings 33 per cent to Rs 31 crore. The performance would have been better but for the pressure on margins owing to the firm trend in the input cost, of steel in particular. The impact of the input cost rise was offset to a certain extent by the revision in the product price. The company also resorted to trading of imported bearings, which appears to have boosted performance.

The operating profit margin has staged a recovery since the third quarter of last fiscal. The revision of product price and the softening of steel price have helped the company post a sharp growth in earnings for the quarter ended September 2005. The turnover for this period increased by 36 per cent to Rs 113.4 crore and the post-tax earnings almost doubled to Rs 15.2 crore from Rs 7.2 crore.

Going forward, the performance of the company is likely to grow at a steady clip. The growth in automobile production and industrial output would continue to drive demand for bearings. The recent pick-up in the original equipment market would also translate into higher demand from the lucrative replacement market.

The company has also been identified as a sourcing base by its parent company. This would result in higher contribution of exports. Exports now account for about 13 per cent of the earnings. The only hitch from a short-term perspective is the capacity constraint the company is likely to face. The company operated at peak capacity last year. The growth potential would get hampered unless the company expands its production capacity. Taking into account the relatively low debt burden, the company appears well positioned to fund expansion projects through borrowed funds and internal accruals.

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