The stock of SKF India has dropped by about 20 per cent since it touched its one-year high of ₹1,540 in early April. Market volatility, coupled with subdued results, has pulled down the stock. But, being a play on the revival in economic growth, the fall presents a good opportunity for long-term investors.

Supplying products such as bearings, seals and lubricants for both automotive and industrial requirements, the company will be a direct beneficiary of the turnaround in auto sales and a pick up in industrial production as the economy recovers.

Its market leadership position, technological backing from its parent, Sweden-based SKF AB and debt-free status are other factors that make the stock attractive. At the current market price, it trades at about 33 times its trailing 12-month earnings.

This is at a discount to its peer FAG Bearings, which trades at about 41 times. Those with at least a two-year perspective can buy the stock.

Ride on revival

Bearings are used in almost all equipment to regulate speed and reduce friction. SKF has about 28 per cent market share in the bearings industry in India and is dependent almost equally on the automotive and industrial segments for its revenues.

The cooling off of inflation, cut in interest rates and improving automobile sales suggest that India is gradually moving towards high economic growth.

With clients such as Tata Motors, Maruti, Mahindra and Mahindra and Toyota, SKF is well-positioned to benefit from the cyclical turnaround in commercial vehicle and car sales.

Besides, bearings are used across industries such as material handing, power, mining and railways.

The revival visible in some pockets such as road building, construction and mining activites will aid SKF. The company is also optimistic on business from railways in the near to medium term

SKF expects good growth in the renewable energy space too, given the government’s thrust. Companies such as Gamesa, Vestas and Suzlon, operating in the renewable energy space, are among its clients.

In the June 2015 quarter, the company’s net sales grew about 2 per cent year-on-year to ₹603 crore.

Room for margin expansion

Net profits dropped by 14 per cent to ₹46.5 crore. Operating margins came in at 10.5 per cent, about two percentage points lower, due to a mix of forex losses (rupee vs euro) on import of inputs and lower operating leverage from cut back in production to facilitate inventory liquidation.

Sales can be expected to pick up steam over the next few quarters, as the revival gains ground. There is scope for margin expansion too, as the company improves its local sourcing for industrial bearings.

Currently, a majority of the industrial bearings are imported from the parent and sold as traded goods here. SKF Technologies, a subsidiary of the parent SKF, has recently set up a plant in Ahmedabad to manufacture bearings for a few industries.

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