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SYNOPSIS

We initiated coverage of SKF India Ltd

and set a target Price of Rs.723.00 for

Medium Term investment.

SKF Group is the leading global

supplier of products, solutions and

services within rolling bearings, seals,

mechatronics, services and lubrication

systems.

SKF and Bombardier Aerospace have

entered into a long-term contract for

SKF to supply over 40 different rod

assemblies and titanium bearings for

Bombardier's all new CSeries aircraft.

SKF delivers critical components to

flywheel systems and is now entering a

project with Volvo Car Corporation and

Volvo Group aimed at taking flywheels

to mass production.

Net Sales and PAT of the company are

expected to grow at a CAGR of 20% and

38% over 2009 to 2012E.

Years Net sales EBITDA PAT EPS P/E

CY 10 20931.70 2794.30 1770.20 33.57 19.06

CY 11E 24699.41 3334.42 2186.92 41.47 15.43

CY 12E 27663.33 3706.89 2464.14 46.73 13.70

Stock Data:

Sector: Capital Goods

Face Value Rs. 10.00

52 wk. High/Low (Rs.) 663.45/451.50

Volume (2 wk. Avg.) 5069.00

BSE Code 500472

Market Cap (Rs in mn) 33747.20

Share Holding Pattern

1 Year Comparative Graph

SKF INDIA LTD BSE SENSEX

C.M.P: Rs. 640.00 Target Price: Rs. 723.00 Date: June 25th 2011 BUY

SKF India Ltd Result Update: Q1 CY 11

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Peer Group Comparison

Name of the company CMP(Rs.) Market

Cap.(Rs.Mn.) EPS(Rs.) P/E(x) P/Bv(x) Dividend (%)

SKF India Ltd 640.00 33747.20 36.87 17.36 3.98 70.00

ESAB India Ltd 482.80 7431.80 37.64 12.83 3.89 200.00

HEG Ltd 236.90 10150.00 30.07 7.88 1.18 100.00

Vesuvius India Ltd 352.00 7144.20 25.46 13.83 2.83 40.00

Investment Highlights

Q1 CY11 Results Update

SKF India Ltd has posted profit of Rs 609.50 million for the quarter ended on

March 31, 2011 as against Rs 435.70 million in the same quarter last year, an

increase of 39.89%. It has reported net sales of Rs 6332.30 million for the quarter

ended on March 31, 2011 as against Rs 5042.80 million in the same quarter last

year, a rise of 25.57%. During the quarter, it reported earnings of Rs 11.56 a

share.

Quarterly Results - Standalone (Rs in mn)

As At Mar-11 Mar-10 %change

Net sales 6332.30 5042.80 25.57

PAT 609.50 435.70 39.89

Basic EPS 11.56 8.26 39.89

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Break up of Expenditure

Board recommended Dividend

SKF India Ltd has recommended a Dividend of Rs. 7/- per share (which includes a

Golden Jubilee dividend of Rs. 1/-) on the Equity Share of Rs. 10/- each.

SKF signs contract with Bombardier

SKF and Bombardier Aerospace have entered into a long-term contract for SKF to

supply over 40 different rod assemblies and titanium bearings for Bombardier's all

new CSeries aircraft. The CSeries aircraft, which is optimized for the single-aisle

100 to 149 market will enter service in 2013.

SKF cooperates with Volvo

SKF delivers critical components to flywheel systems and is now entering a project

with Volvo Car Corporation and Volvo Group aimed at taking flywheels to mass

production. The project has received a grant of 6.57 million Swedish kronor from

the Swedish Energy Agency to develop flywheel technology for kinetic energy

recovery for the next generation of Volvo cars. This autumn, Volvo Car Corporation

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will be among the world's first car makers to test the potential of this flywheel

technology in passenger vehicles.

Company Profile

SKF Group is the leading global supplier of products, solutions and services within

rolling bearings, seals, mechatronics, services and lubrication systems. Services

include technical support, maintenance services, condition monitoring and training.

SKF was founded in 1907 and grew at a rapid rate to become a global company. As

early as 1920, the company was well established in Europe, North and Latin America,

Asia and Africa. Today, SKF is represented in more than 130 countries. The company

has more than 100 manufacturing sites and also sales companies supported by about

15,000 distributor locations. SKF also has a widely used e-business marketplace and

an efficient global distribution system.

Technology platforms

� Bearings and units

� Seals

� Mechatronics

� Services

� Lubrication Systems

By utilizing capabilities from all or some of the platforms, SKF develops tailor-made

offers for each customer segment, helping customers improve performance, reduce

energy use and lower total costs, while bringing increased added value to SKF.

Divisions

� Industrial Division

� Service Division

� Automotive

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SKF operates in around 40 customer segments, whereof examples include cars and

light trucks, wind energy, railway, machine tool, medical, food and beverage and paper

industries.

Financial Results

12 Months Ended Profit & Loss Account (Standalone)

Value(Rs.in.mn) CY09 CY10 CY11E CY12E

Description 12m 12m 12m 12m

Net Sales 15840.50 20931.70 24699.41 27663.33

Other Income 0.00 0.00 0.00 0.00

Total Income 15840.50 20931.70 24699.41 27663.33

Expenditure -14251.30 -18137.40 -21364.99 -23956.45

Operating Profit 1589.20 2794.30 3334.42 3706.89

Interest 131.60 199.80 289.71 370.83

Gross profit 1720.80 2994.10 3624.13 4077.72

Depreciation -289.80 -333.40 -360.07 -388.88

Profit Before Tax 1431.00 2660.70 3264.06 3688.84

Tax -488.50 -890.50 -1077.14 -1224.69

Profit After Tax 942.50 1770.20 2186.92 2464.14

Equity capital 527.30 527.30 527.30 527.30

Reserves 662.00 7959.80 10146.72 12610.86

Face value 10.00 10.00 10.00 10.00

EPS 17.87 33.57 41.47 46.73

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Quarterly Ended Profit & Loss Account (Standalone)

Value(Rs.in.mn) 30-Sep-10 31-Dec-10 31-Mar-11 30-Jun-11E

Description 3m 3m 3m 3m

Net sales 5338.20 5463.60 6332.30 6712.24

Other income 0.00 0.00 0.00 0.00

Total Income 5338.20 5463.60 6332.30 6712.24

Expenditure -4690.70 -4778.50 -5413.10 -5705.40

Operating profit 647.50 685.10 919.20 1006.84

Interest 54.80 61.50 82.10 90.31

Gross profit 702.30 746.60 1001.30 1097.15

Depreciation -85.80 -88.00 -91.60 -98.93

Profit Before Tax 616.50 658.60 909.70 998.22

Tax -205.80 -219.30 -300.20 -330.41

Profit After Tax 410.70 439.30 609.50 667.81

Equity capital 527.30 527.30 527.30 527.30

Face value 10.00 10.00 10.00 10.00

EPS 7.79 8.33 11.56 12.66

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Key Ratios

Particulars CY09 CY10 CY11E CY12E

EBITDA Margin (%) 10.03% 13.35% 13.50% 13.40%

PBT Margin (%) 9.03% 12.71% 13.22% 13.33%

PAT Margin (%) 5.95% 8.46% 8.85% 8.91%

P/E Ratio (x) 35.81 19.06 15.43 13.70

ROE (%) 79.25% 20.86% 20.49% 18.76%

ROCE (%) 157.86% 36.85% 34.61% 31.17%

Debt Equity Ratio 0.00 0.00 0.00 0.00

EV/EBITDA (x) 21.24 12.08 10.12 9.10

Book Value (Rs.) 22.55 160.95 202.43 249.16

P/BV 28.38 3.98 3.16 2.57

Charts:

Net Sales & PAT

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P/E Ratio(x)

EV/EBITDA(x)

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P/BV

Outlook and Conclusion

At the current market price of Rs.640.00, the stock is trading at 15.43 x CY11E

and 13.70 x CY12E respectively.

Earning per share (EPS) of the company for the earnings for CY11E and CY12E

is seen at Rs.41.47 and Rs.46.73 respectively.

Net Sales and PAT of the company are expected to grow at a CAGR of 20% and

38% over 2009 to 2012E respectively.

On the basis of EV/EBITDA, the stock trades at 10.12 x for CY11E and 9.10 x

for CY12E.

Price to Book Value of the stock is expected to be at 3.16 x and 2.57 x

respectively for CY11E and CY12E.

We expect that the company will keep its growth story in the coming quarters

also. We recommend ‘BUY’ in this particular scrip with a target price of

Rs.723.00 for Medium term investment.

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Industry Overview

Engineering Sector: Market & Opportunities

India's engineering industry is highly competitive with a number of players in each

segment. The engineering sector has been growing, driven by growth in end user

industries and the new projects being taken up in the power, railways, infrastructure

development, and private sector investments fields amongst others. The industry

attracted FDI inflows of US$ 1,196.7 million from August 1991-July 2006

India's exports of engineering goods are valued at US$ 27 billion during 2006-07

which represents a 6 per cent growth over the exports for 2005-06 (US$ 20 billion).

The engineering sector accounted for 14 per cent of the country's total exports. It is

also noteworthy that 40 per cent of India's engineering export is from the small and

Engineering sector

Heavy Engineering Light engineering

Transport

Capital goods

Other machinery/

Equipment

Low-tech items like

castings, forgings and

Fasteners

Highly sophisticated

Microprocessor-based

Process control

equipment, diagnostic

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medium enterprises (SME) sector. According to Engineering Exports Promotion

Council (EEPC), engineering exports could touch US$ 30 billion by 2008-09. In such a

scenario, India, driven by the engineering sector, will emerge as a key global

manufacturing hub

Industry demand is driven by investments in core sectors

The demand from this sector depends largely on GDP growth, which in turn is a

function of expenditure in core segments like power, railways, and infrastructure

development, private sector investments, and the speed at which projects are

implemented. The power sector is the largest contributor to the revenues of

engineering companies. Engineering majors like Bharat Heavy Electricals Limited

(BHEL) and ABB Limited derive a significant chunk of their revenues (69 per cent and

60 per cent, respectively) through the supply of equipment to the power sector.

Infrastructure is another key area of operation. Larsen & Toubro Limited, for example,

garners around 35 per cent of its sales from infrastructure activities like engineering,

design and construction of industrial projects, social and physical projects like

housing, hospitals, information technology (IT) parks, expressways, bridges, ports, and

water/effluent treatment projects. The industrial segment contributes to around 30

per cent of the total revenues of the engineering sector. While India’s engineering

industry has capabilities in manufacturing the range of machinery required by the

different user sectors, the rapid rise in demand has led to a large part of the

machinery requirements being met through imports. This indicates the size of

opportunity for investment in the engineering and capital goods sector in India. The

engineering industry has attracted FDI inflows of US$ 1,196.73 million from August

1991-July 2006.

Indian Engineering goods are gaining acceptance in overseas markets

India’s exports of engineering goods are valued at US$ 27 billion during 2006-07

which represents a 36 per cent growth over the exports for 2005-06 US$ 20 billion).

The engineering sector accounted for 14 per cent of the country’s total exports. It is

also noteworthy that 40 per cent of India’s engineering export is from the small and

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medium enterprises (SME) sector. A key driver for increased engineering exports is the

trend towards shifting of global manufacturing bases to countries like India that offer

lower costs and good engineering talent. This trend is expected to continue and boost

exports of engineering goods from India over the next 5 years. According to

Engineering Exports Promotion Council (EEPC), engineering exports could touch US$

30 billion by 2008-09. In such a scenario, India, driven by the engineering sector, will

emerge as a key global manufacturing hub.

The nature of Indian engineering exports is also changing with time. India is fast

moving from exporting low value goods to developing countries to more sophisticated

goods targeted at developed countries. Capital goods account for 27 per cent of total

engineering exports. Exports to European Union countries and North America

accounted for 19 per cent and 17 per cent respectively, of total engineering exports in

2005-06. Engineering goods worth US$ 3.34 billion were exported to USA alone in

April – Feb 2006-07

Growing Demand

Capacity creation and transformation in sectors such as infrastructure, power,

mining, oil & gas, refinery, steel, automotive, consumer durables are driving growth in

the engineering industry. The framework below captures some of the key factors that

are contributing to domestic and international demand for engineering goods from

India. Restructuring of the state electricity boards in different states, growth of private

sector players and focus on capacity creation have driven growth in the power sector.

Conclusion

The Engineering sector’s future outlook is promising. Drivers like power projects, other

infrastructure development activities, industrial growth and favorable policy

regulations will drive growth in manufacturing. The Indian engineering industry has

been witnessing significant level of capability enhancement over the years. As export

markets open up, this will help India develop a strong presence in global engineering

exports. Power sector contributes the largest to the engineering companies’ revenues.

Major players in this sector like ABB and BHEL derive 60 per cent and 69 per cent of

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their revenues from supplying equipments to the power sector. Going forward, with

the Government clearing the blueprint for adding 100,000 MW in the tenth (2002-07)

and eleventh 2007-12) five-year plans, the potential are high for the engineering

majors. Emerging trends such as outsourcing of engineering services can provide new

opportunities for quantum growth. Engineering and design services such as new

product designing, product improvement, maintenance and designing manufacturing

systems are increasingly getting outsourced to countries like India and China. India’s

engineering sector has significant potential for future growth, in manufacturing as well

as services.

With development in associated sectors like automotive, one of the largest evolving

markets for engineering and industrial goods, and a well developed technical human

resources pool, India is poised to make significant strides in all segments of

engineering.

_____________ ____ _________________________ Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation

for the purchase or sale of any financial instrument or as an official confirmation of any

transaction. The information contained herein is from publicly available data or other

sources believed to be reliable but do not represent that it is accurate or complete and it

should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s

affiliates 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. This document

is provide for assistance only and is not intended to be and must not alone be taken as the

basis for an investment decision.

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