1QCY2013 Result Update | Auto Ancillary

April 25, 2013

FAG Bearings
Performance Highlights
Y/E Dec (` cr) Net Sales EBITDA EBITDA Margin (%) Adj. PAT 1QCY13 340 41 12.2 25 1QCY12 363 64 17.5 46 % chg (yoy) (6.5) (34.8) (530)bp (45.0) 4QCY12 347 41 11.9 30 % chg (qoq) (2.2) 0.3 30bp (14.3)

NEUTRAL
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net Debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Auto Ancillary 2,215 (195) 0.3 1,827/1,290 2,696 10 19,407 5,916 FAGB.BO FAG@IN

`1,333 -

Source: Company, Angel Research

FAG Bearings (FAG) reported a disappointing set of results for 1QCY2013 as EBITDA margins declined 530bp yoy owing to raw-material cost pressures and lower utilization levels. Due to the lower-than-expected performance and continued margin pressures, we revise our earnings estimates downwards for CY2013/14 by 16.4%/13.4%. We expect the companys performance to improve going ahead, led by easing of interest rates in CY2013, which is expected to revive demand in the automotive and industrial sectors. Nevertheless, at 12.2x CY2014E earnings, we believe the stock is fairly valued, leaving limited room for any potential upside. Hence, we recommend a Neutral rating on the stock. Below par 1QCY2013 performance: For 1QCY2013, FAGs top-line posted a decline of 6.5% yoy (2.2% qoq) to `340cr, which although was slightly higher than our expectation of `329cr. The top-line performance continued to be impacted by the slowdown in the automotive and industrial sectors. The operating profit fell significantly by 34.8% yoy (flat qoq) as EBITDA margins declined sharply due to raw-material cost pressures and lower utilization levels. The raw-material cost and employee expenditure as a percentage of sales surged 165bp and 140bp yoy, respectively. Further, due to lower operating leverage benefits, other expenditure as a percentage of sales rose by 230bp yoy. Led by a weak operating performance and lower other income, the net profit declined 45% yoy (14.3% qoq) to `25cr, lower than our expectation of `30cr. Outlook and valuation: We maintain our positive stance on FAG, considering its strong parentage, debt-free status and cash balance worth `117/share on the books. Nevertheless, at 12.2x CY2014E earnings, we believe the stock is fairly valued, leaving limited room for any potential upside. Hence, we recommend a Neutral rating on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 51.3 21.7 16.3 10.7

Abs. (%) Sensex FAG Bearings

3m (3.5)

1yr 13.2

3yr 9.7

(20.5) (14.7) 122.2

Key financials (Standalone)

Y/E Dec (` cr) Net Sales % chg Net Profit % chg EBITDA (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

CY2011 1,309 24.8 175.8 46.1 19.4 105.9 12.6 3.0 27.0 34.9 1.4 7.8

CY2012 1,447 10.6 159.2 (9.5) 15.3 95.8 13.9 2.5 19.8 22.9 1.3 9.1

CY2013E 1,525 5.4 146.9 (7.7) 14.5 88.4 15.1 2.2 15.5 18.5 1.2 8.8

CY2014E 1,742 14.2 181.9 23.8 15.7 109.5 12.2 1.9 16.5 20.3 1.0 6.8

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

Please refer to important disclosures at the end of this report

FAG Bearings | 1QCY2013 Result Update

Exhibit 1: Quarterly financial performance (Standalone)

Y/E Dec (` cr) Net Sales Consumption of RM (% of Sales) Staff Costs (% of Sales) Purchases of TG (% 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 Adj PAT Adj. PATM Equity capital (cr) Reported EPS (`)
Source: Company, Angel Research

1QCY13 340 123 36.2 30 8.8 90 26.6 55 16.2 298 41 12.2 0 10 7 39 39 11.4 13 34.5 25 25 7.5 16.6 15.3

1QCY12 363 130 35.7 27 7.4 92 25.4 51 13.9 300 64 17.5 0 6 11 68 68 18.8 22 32.2 46 46 12.7 16.6 27.9

% chg (yoy) (6.5) (5.3) 10.9 (2.1) 8.7 (0.5) (34.8) (41.7) 53.0 (36.3) (43.1) (43.1) (39.0) (45.0) (45.0)

4QCY12 347 123 35.4 30 8.7 104 29.9 49 14.0 306 41 11.9 0 9 9 42 42 12.0 12 29.0 30 30 8.6 16.6

% chg (qoq) (2.2) 0.0 (1.4) (13.0) 13.0 (2.5) 0.3 (4.5) 9.7 (23.8) (7.1) (7.1) 10.6 (14.3) (14.3)

CY2012 1,447 503 34.8 113 7.8 405 28.0 206 14.2 1,226 220 15.2 1 30 45 233 233 16.1 74 31.8 159 159 11.0 16.6

CY2011 1,309 414 31.6 101 7.7 343 26.2 196 15.0 1,055 254 19.4 1 23 31 261 261 19.9 85 32.6 176 176 13.4 16.6 105.9

% chg (yoy) 10.6 21.5 11.6 17.8 5.0 16.3 (13.2) 3.2 34.0 44.7 (10.5) (10.5)

(9.5) (9.5)

(45.0)

17.9

(14.3)

95.8

(9.5)

Exhibit 2: 1QCY2013 Actual vs Angel estimates

Y/E Dec (` cr) Net sales EBITDA EBITDA margin (%) Adj. PAT
Source: Company, Angel Research

Actual 340 41 12.2 25

Estimates 329 42 12.9 30

Variation (%) 3.1 (2.5) (70)bp (16.2)

Top-line growth impacted due to slowdown in automotive and industrial segments: For 1QCY2013, FAGs top-line posted a decline of 6.5% yoy (2.2% qoq) at `340cr, which although was slightly higher than our expectations of `329cr. The top-line performance continued to be impacted by the slowdown in the automotive and industrial sectors which are the key drivers of the companys revenue performance.

April 25, 2013

FAG Bearings | 1QCY2013 Result Update

Exhibit 3: Top-line down 6.5% yoy

(` cr) 400 350 300 250 200 150 100 50 0
310 318 334 348 363 380 356 16.6

Net sales (LHS)

30.5 22.5 17.3 30.8

Net sales growth (RHS)

(%) 35.0 30.0 25.0 20.0 15.0 10.0 5.0

(6.5) 340

19.5

6.8 (0.3)

347

0.0 (5.0) (10.0)

1QCY11

2QCY11

3QCY11

4QCY11

1QCY12

2QCY12

3QCY12

4QCY12

Source: Company, Angel Research

EBITDA margin remains under pressure: For the quarter, the operating profit fell significantly by 34.8% yoy (flat qoq) as EBITDA margins witnessed a sharp decline, led by raw-material cost pressures and lower utilization levels. The raw-material cost and employee expenditure as a percentage of sales surged by 165bp and 140bp yoy, respectively, during the quarter. Further, due to lower operating leverage benefits, other expenditure as a percentage of sales grew by 230bp yoy. As a result, the operating profit declined 34.8% yoy (flat qoq) to `41cr.

Exhibit 4: EBITDA margin remains under pressure...

(%) 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 20.5 20.0 19.7 17.8 17.5 16.8 14.5 56.5 56.3 58.2 61.8 61.1 EBITDA margin Raw material cost/sales 65.3

Exhibit 5: ... leading to significant decline in profits

( ` cr) 50 45 40 35 30 25 20 15 10 5 0 13.8 14.1
Net profit (LHS) Net profit margin (RHS)

1QCY13

(%) 16.0 14.0

13.6

12.7 12.3

12.2 10.4 8.6 7.5

63.1

62.2

62.8

12.0 10.0 8.0 6.0 4.0 2.0 0.0

11.9

12.2

43

45

45

43

46

46

37

30

25

1QCY11

2QCY11

3QCY11

4QCY11

1QCY12

2QCY12

3QCY12

4QCY12

1QCY13

1QCY11

2QCY11

3QCY11

4QCY11

1QCY12

2QCY12

3QCY12

4QCY12

Source: Company, Angel Research

Source: Company, Angel Research

Net profit down sharply by 45% yoy: Led by a weak operating performance and lower other income, the net profit declined 45% yoy (14.3% qoq) to `25cr, lower than our expectations of `30cr.

April 25, 2013

1QCY13

FAG Bearings | 1QCY2013 Result Update

Investment arguments
Second-largest player with an ~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 industry players. We believe revival in demand in the automotive and industrial segments will aid FAG in registering a CAGR of ~10% in its net sales over CY2012-14. Strong fundamentals: FAGs net asset turnover remains high (5.2x in CY2012) due to largely depreciated assets. The companys strong business model enables it to record robust and consistent RoCE of ~22%. Cash flow generation is also expected to remain healthy going forward. Industry outlook likely to remain challenging in the near term: We believe that the industrial and automobile OEM segments outlook is likely to remain challenging for the next couple of quarters on account of weak consumer sentiments. However, expected easing of interest rates in CY2013 will revive demand and drive growth in CY2014.

Outlook and valuation

Due to lower-than-expected performance and continued margin pressures, we revise our earnings estimates downwards for CY2013/14 by 16.4%/13.4%. We expect the companys performance to improve going ahead, led by easing of interest rates in CY2013, which is expected to revive demand in the automotive and industrial sectors. We maintain our positive stance on FAG, considering its strong parentage, debt-free status and cash balance worth `117/share on the books.

Exhibit 6: Change in estimates

Y/E Dec. Net Sales (` cr) OPM (%) EPS (`) Earlier Estimates CY2013E 1,567 16.0 105.8 CY2014E 1,805 16.6 126.4 Revised Estimates CY2013E 1,525 14.5 88.4 CY2014E 1,742 15.7 109.5 % chg CY2013E (2.6) (145)bp (16.4) CY2014E (3.5) (90)bp (13.4)

Source: Company, Angel Research

At `1,333, the stock is trading at 12.2x CY2014E earnings, which is largely in-line with its three-year historical average. Due to limited upside from current levels, we recommend Neutral rating on the stock.

Key risks
1) Any sharp revival in demand in the automotive and industrial segments post the likely easing of interest rates poses an upside risk to our earnings estimates. Adverse currency movement can negatively affect FAGs trading business. Cheap imports from China could impact business of bearing players.

2) 3)

April 25, 2013

FAG Bearings | 1QCY2013 Result Update

Exhibit 7: Key assumptions

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

CY09 50.2 9.1 95

CY10 67.2 33.8 135

CY11 78.7 17.1 154

CY12E 81.5 3.6 144

CY13E CY14E 83.1 2.0 135 92.3 11.0 136

Exhibit 8: One-year forward P/E band

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

Exhibit 9: One-year forward P/E chart

(x) 25.0 20.0 15.0 10.0 5.0 0.0 One-yr forward P/E Five-yr average P/E

Feb-10

Feb-11

Dec-06

Dec-07

Mar-12

Nov-05

Dec-06

Dec-07

Feb-10

Jan-09

Oct-03

Oct-04

Apr-13

Jan-09

Mar-11

Mar-12

Source: Company, Angel Research

Source: Company, Angel Research

Exhibit 10: Auto Ancillary Recommendation summary

Company Reco. CMP (`) 266 293 232 9,001 138 1,333 181 26 Tgt. price (`) 326 309 146 222 30
#

Upside (%) 22.5 5.4 6.1 22.2 13.8

P/E (x) FY14E 13.5 11.9 15.9 25.4 17.8 15.1 14.5 4.8
^

EV/EBITDA (x) FY14E 8.8 5.1 6.7 15.9 9.5 8.8 6.8 3.7 FY15E 7.7 4.0 5.8 13.0 8.0 6.8 5.9 3.1 12.2 8.5 13.4 21.3 15.5 12.2 12.3 3.5

Nov-05

Oct-03

Oct-04

RoE (%) FY14E 27.1 13.2 13.6 17.2 18.0 15.5 27.5 11.1 FY15E 23.7 16.9 14.7 17.5 17.9 16.5 25.8 13.7

FY13-15E EPS CAGR (%) 8.4 7.4 18.6 17.8 23.1 6.9 23.0 49.0

FY15E

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

Accumulate Neutral Neutral Accumulate Neutral Buy Accumulate

Motherson Sumi*

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

December year end;

September year end

Company background
FAG Bearings (FAG), a group company of Germany-based Schaeffler Group, is one of the leading suppliers of ball bearings with ~15% domestic market share. FAG manufactures ball bearings, cylindrical bearings, spherical bearings and tapered roller bearings through its plant located in Vadodra, Gujarat. The company is a market leader in the spherical bearing space, with an ~55% market share. FAG also imports specialized and heavy-size bearings from its global associates to meet the requirements of the domestic industrial segment. As a result, the trading portfolio constitutes ~34% to its net sales. FAG caters to leading domestic OEM players as well as the replacement market. In the industrial segment, the company supplies to the automotive, construction machinery, steelworks, power transmission engineering, material handling engineering, wind power plants and railways segments.

April 25, 2013

Apr-13

FAG Bearings | 1QCY2013 Result Update

Profit and loss statement (Standalone)

Y/E Dec (` cr) Total operating income % chg Total expenditure Net raw material costs Other mfg costs Employee expenses Other EBITDA % chg (% of total op. income) Depreciation & amortization EBIT % chg (% of total op. income) Interest and other charges Other income Extraordinary expense/ (income) PBT (reported) Tax (% of PBT) PAT (reported) ADJ. PAT % chg (% of total op. income) Basic EPS (`) Adj. EPS (`) % chg CY09 820 7.6 708 506 63 63 76 113 (30.7) 13.7 20 93 (34.8) 11.3 1 6 (8) 106 34 32.2 72 64 (30.2) 7.8 38.5 38.5 (30.2) CY10 1,049 27.8 862 613 51 79 120 186 65.3 17.7 20 166 79.5 15.8 1 14 (2) 181 60 33.4 120 119 85.6 11.3 71.5 71.5 85.6 CY11 1,309 24.8 1,054 757 56 101 139 254 36.7 19.4 23 232 39.7 17.7 2 31 261 85 32.6 176 176 48.1 13.4 105.8 105.9 48.1 CY12 1,447 10.6 1,226 908 61 113 144 221 (13.2) 15.3 30 191 (17.8) 13.2 2 45 233 74 31.8 159 159 (9.5) 11.0 95.8 95.8 (9.5) CY13E 1,525 5.4 1,304 953 66 122 163 221 0.1 14.5 40 181 (5.0) 11.9 2 40 219 72 33.0 147 147 (7.7) 9.6 88.4 88.4 (7.7) CY14E 1,742 14.2 1,468 1,080 71 140 178 273 23.6 15.7 44 230 26.8 13.2 2 44 272 90 33.0 182 182 23.8 10.4 109.5 109.5 23.8

April 25, 2013

FAG Bearings | 1QCY2013 Result Update

Balance sheet statement (Standalone)

Y/E Dec (` cr) SOURCES OF FUNDS Equity share capital Reserves & surplus Shareholders Funds Total loans Deferred tax liability Other long term liabilities Long term provisions Total Liabilities APPLICATION OF FUNDS Gross block Less: Acc. depreciation Net Block Capital work-in-progress Investments Long term loans and advances Other noncurrent assets Current assets Cash Loans & advances Other Current liabilities Net current assets Total Assets 413 272 142 7 0 461 173 78 210 144 317 466 419 278 141 9 0 628 288 81 258 202 426 576 475 297 178 57 0 120 641 233 32 377 243 399 754 601 322 279 114 4 75 671 195 79 397 233 437 910 727 362 365 73 1 75 756 268 76 412 222 534 1,048 795 406 389 80 1 75 923 367 87 469 249 674 1,220 17 445 462 5 466 17 557 573 3 576 17 713 730 3 1 19 754 17 863 880 6 2 23 910 17 1,000 1,017 6 2 23 1,048 17 1,172 1,189 6 2 23 1,220 CY09 CY10 CY11 CY12 CY13E CY14E

Note: Cash includes Bank Deposits due to mature within 12 months

April 25, 2013

FAG Bearings | 1QCY2013 Result Update

Cash flow statement (Standalone)

Y/E Dec (` cr) Profit before tax Depreciation Change in working capital Others Other income Direct taxes paid Cash Flow from Operations (Inc.)/Dec. in fixed assets (Inc.)/Dec. in investments 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 balances Closing Cash balances CY09 106 20 40 38 (6) (34) 163 (5) 6 1 9 (64) (55) 110 64 173 CY10 181 20 6 (0) (14) (60) 132 (8) 14 7 10 (33) (24) 115 173 288 CY11 261 23 (80) (5) (31) (85) 83 (104) 31 (73) 8 (140) (132) (122) 288 166 CY12 233 30 (38) 30 (45) (74) 137 (183) (4) 45 (143) 17 (67) (50) (56) 166 110 CY13E 219 40 (23) (40) (72) 124 (85) 4 40 (41) 10 (10) 74 195 268 CY14E 272 44 (42) (44) (90) 140 (75) (0) 44 (32) 10 (10) 98 268 367

Note: Closing Cash balances excludes Bank Deposits due to mature within 12 months

April 25, 2013

FAG Bearings | 1QCY2013 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 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 / Int.) (0.4) (1.5) 132.2 (0.5) (1.5) 186.5 (0.3) (0.9) 129.6 (0.2) (0.9) 105.3 (0.3) (1.2) 94.9 (0.3) (1.3) 105.4 2.0 58 50 53 73 2.5 40 42 53 49 2.9 40 48 56 42 2.7 38 59 56 51 2.3 38 56 51 61 2.3 40 56 47 60 21.1 31.9 14.8 31.9 58.2 23.0 34.9 44.7 27.0 22.9 26.7 19.8 18.5 25.8 15.5 20.3 29.6 16.5 11.3 0.7 2.6 19.7 19.7 15.8 0.7 3.6 38.4 38.4 17.7 0.7 3.3 38.9 38.9 13.2 0.7 2.3 21.1 21.1 11.9 0.7 2.2 17.2 17.2 13.2 0.7 2.4 20.8 20.8 38.5 38.5 55.1 4.5 276.4 71.5 71.5 84.5 5.0 343.7 105.8 105.9 119.4 10.0 438.0 95.8 95.8 114.0 5.0 527.9 88.4 88.4 112.5 5.0 610.5 109.5 109.5 135.8 5.0 714.2 34.6 24.2 4.8 0.3 2.4 18.1 4.4 18.6 15.8 3.9 0.4 1.7 10.4 3.3 12.6 11.2 3.0 0.8 1.4 7.8 2.6 13.9 11.7 2.5 0.4 1.3 9.1 2.2 15.1 11.9 2.2 0.4 1.2 8.8 2.0 12.2 9.8 1.9 0.4 1.0 6.8 1.6 CY09 CY10 CY11 CY12 CY13E CY14E

April 25, 2013

FAG Bearings | 1QCY2013 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

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 Bearings 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%)

April 25, 2013

10