For 4QCY2008, FAG Bearings clocked 9.6% growth in net sales to Rs186.8 crore, which exceeded our expectation of Rs169 crore.
FAG registered EBITDA margins of 19.5% (17%), a substantial rise of 252bp. This was basically due to the 493bp decrease in other expenditure, which accounted for over 15.9% of sales (20.8% in 4QCY2007).
However, the same was off-set by the increase in labour costs by 163bp. Raw material cost for the quarter rose by 77bp and accounted for 54.9% net sales (54.1% for 4QCY2008).
Strong growth in EBITDA was supported by lower tax rate of 33.7% (43.2%), which helped the company post robust growth in bottomline. Depreciation remained flat at Rs5.1cr (Rs5.2cr). All this contributed to the rise in PAT Margins by 313bp and PAT of Rs21.4cr, a rise of 47.4% y-o-y.
At the CMP, the stock is quoting at 4.5x CY2009E earnings, which is much lower than its historical P/E of around 14x. FAG Bearings prospects are derived from demand arising in the Capital Goods and Automobile industry.
We believe industry valuations are likely to remain subdued in the near term due to overall slowdown in the sector.
We maintain a BUY on the stock, with a target price of Rs350, owing to its debt free status and strong balance sheet, which would act as a cushion in overall industrial slowdown.