SNL Bearings Ltd (SNL) (BSE: 505827) was promoted by Shriram group of Industries in technical collaboration with INA Germany in 1983. SNL manufactures needle roller bearings & special purpose machines for the bearing industry. NRB Bearings (NRB) took over the management of SNL Bearing in the year 2000. The acquisition of SNL was done to consolidate NRB’s technical and machine expertise given the similar nature of the product line. SNL has single manufacturing unit in Ranchi.
SNL operates in the Antifriction bearing industry and the major user industries of antifriction bearings are automobiles, general engineering, railways, electrical equipment etc. The company operates in the following market segments: 1). Automotive OEM, 2). After Market and 3). Exports
The market segmentation of demand is approximately 90% from original equipment manufacturers (OEM) and balance from replacement market/exports. The automotive industry is the largest consumer of bearing products and SNL supplies to the 2/3-wheeler, passenger cars, commercial vehicles and farm equipment segments
Needle roller bearings are the smallest and lightest of the roller bearing family. Needle roller bearings are useful in applications where weight and space are a concern. Some of the characteristics are: Higher load capacity, Ability to handle a larger and more rigid shaft in a given application & excellent rolling characteristics within a small cross section.
Operational and Financial Analysis
NRB is majority stakeholder (73.45%) in SNL and the company liens on NRB for majority of its business. Other key clients of the company include Bajaj, LML, Kinetic Engg. TVS, Maruti And Tata Motors.
While SNL and NRB are in similar business line, their performance parameters defer significantly from each other. This presents an interesting case study for relationship between parent company and its subsidiary manufacturing similar product line.
NRB manufactures both ball bearings and roller bearings with manufacturing facilities at Jalna, Waluj, Hyderabad, Aurangabad, Thane, Pantnagar and Thailand (NRB Bearings Thailand Limited).
SNL has significant related party transactions with NRB. SNL also leverages marketing / sales network of NRB. So indirectly its future heavily depends on NRBs growth prospects.
|
FY15 |
FY16 |
FY17 |
FY18 |
FY19 |
|
|
SNL Operating Revenue (INR Cr.) |
26.48 |
30.07 |
33.48 |
38.31 |
40.64 |
|
NRB Operating Revenue (INR Cr.) |
670.31 |
674.94 |
725.54 |
855.14 |
964.85 |
|
% of sales to NRB |
59% |
61% |
60% |
51% |
42% |
SNL’s operating revenue has been growing at a CAGR of 11.30% in the past 5 years. Operating profit and net profit have been growing at 11.77% and 15.65% respectively over the same period.
Trade receivables as a % of Operating Revenue has reduced over the years. For FY19, it stood at 15.40%. As on March 31st, 2019 receivables from NRB stood at INR 2.60 Cr.
Raw material costs have been consistently been below 30% over the past 5 years.
Moreover, the company has consistently been focusing on reducing debt. Debt to equity ratio has come down to virtually debt free, in FY19 from 0.36 in FY15.
|
SNL Bearings |
FY15 |
FY16 |
FY17 |
FY18 |
FY19 |
|
ROCE (%) |
44.07 |
54.9 |
54.12 |
46.54 |
36.45 |
|
ROE (%) |
45.42 |
44.47 |
38.31 |
34.11 |
26.05 |
|
ROA (%) |
15.75 |
19.65 |
23.68 |
23.92 |
18.25 |
|
Operating Margin (%) |
29.83 |
31.31 |
32.27 |
31.76 |
30.35 |
|
Net Margin (%) |
16.97 |
18.78 |
19.65 |
21.29 |
19.48 |
|
NRB Bearings |
FY15 |
FY16 |
FY17 |
FY18 |
FY19 |
|
ROCE (%) |
17.44 |
14.07 |
15.88 |
25.63 |
25.71 |
|
ROE (%) |
22.69 |
16.19 |
18.2 |
27.25 |
25.9 |
|
ROA (%) |
6.36 |
4.84 |
5.86 |
9.68 |
9.91 |
|
Operating Margin (%) |
19.16 |
16.94 |
17.25 |
21.2 |
19.85 |
|
Net Margin (%) |
7.96 |
6.37 |
7.23 |
10.71 |
11.32 |
SNL’s margins and financial ratios have been better than its parent company. One major reason could be lower operational expenses for SNL due to its small scale of operations.
Interestingly, NRB hasn’t merged SNL with itself, probably due to high de-listing costs. The sheer small size wouldn’t have made much difference to NRB’s top or bottom line. Management is common for NRB and SNL; all directors derive their salary from NRB. The other major reason could be the tax benefits that SNL enjoy due to its only manufacturing facility being located in Ranchi. All these factors reduce the raw cost on manufacturing of SNL products.
Industry View
Indian bearing market is estimated at INR 95 billion and it constitutes less than 5% of global bearing demand. In terms of consumption, about 60% requirement is catered through domestic production while remaining is met through imports. While there are large numbers of players present in the industry, the competitive intensity is moderate as top 5 players constitute ~80% of market share. Major market holders are having a robust technology collaboration with their parent foreign holding group which is a strength as bearings require highest standards of quality because of their end use in critical machine parts.
Counterfeit products in replacement market (which accounts for 25-30% of total demand for industry) are a serious threat that the industry as a whole is facing. Implementation of stricter emission norms and regulations in India would lead to increased demand for technologically advanced bearings. As of now, bearings content per passenger vehicle is one-third of the developed world.
Outlook
Automobiles comprise passenger cars and vans; two-wheelers, including motorcycles, scooters, and mopeds; commercial vehicles; three-wheelers and quadricycles. The total sales in 2019-20 were around 18% lower at 21.55 million units than in 2018-19. Two-wheeler sales, which comprise a bulk of total sales, fell 17.8% to 17.42 million units. Part of the drop in sales was due to the lockdown introduced in late March. But sales had been falling right through 2019-20. This was a reflection of a slowdown in the Indian economy and a lack of confidence among people in their economic future to be able to pay equated monthly instalments.
The performance of auto ancillary companies was also largely reflective of weak demand in auto sector and recent shutdowns in manufacturing operations in last few days of the quarter. With the ongoing Covid-19 situation we expect sales for April have been completely lost for various companies while May is also expected to follow suit. Fate of auto segment continues to depend on the revival of domestic auto sector. However, the industrial sector could see a recovery once the lockdown is lifted and manufacturing activities resume.
There will be significant changes in buying behaviour after the lockdown. Consumer preference will be more towards individual health, hygiene and cleanliness during travel. Post the pandemic, we expect consumers to switch more towards personal mobility. Shared mobility will take a backseat in the medium term. But with subdued sentiments and an aversion to higher discretionary spends like buying new vehicles, there is expected to be increased demand for used vehicles in the next 3 – 6 months. Due to Covid-19, automotive demand will be significantly impacted in FY21. At the same time, India has low levels of vehicle penetration and the demand is expected to rebound in FY22 positively.
SNL comes out as a strong company with zero debt, access to technology through its parent, stellar margins & returns and strong balance sheet. However, the company will not be optimal for a long-term investor as much of the company’s operations are at the mercy of its parent company.
SNL is currently available at a CMP of INR 124.80 (as on April 25, 2020) and at a PE of 8.51 which is well above its 5-year median PE of 11.93. Trading volume is also very low for the company. The current valuation justifies the fact that the company is a one product company, operating one manufacturing facility and derives much of its business from its parent.
Team 3C Capitals
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