BackSubdued sales hurt SKF India’s profit margin
A weak 3% rise in net sales trickled down into poor profitability as costs also increased in some areas
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The December quarter performance of SKF India Ltd, a leading manufacturer of bearings, seals and lubricants, disappointed the Street on all counts.
Primarily, a weak 3% rise in net sales trickled down into poor profitability as costs also increased in some areas. Subdued demand from the industrial sector, which accounts for nearly half the Swedish firm’s business in India, was the main reason. Analysts said that while demand from the commercial vehicle segment was strong, the machine tools business slackened during the quarter. Exports, although a paltry percentage of the total business, were a tad better when compared with the year-ago period.
The biggest disappointment, as for most manufacturing firms during the quarter, came from the operating margin. At 8.6%, it was 300 basis points below the year-ago period and only half of the Street’s consensus forecast. A basis point is one-hundredth of a percentage point.
Expectations from auto and auto component firms ruled high during the quarter, given the steep fall in raw material costs. SKF India’s gross margin (after deducting raw material costs) improved by about 90 basis point year-on-year. But higher employee costs hurt profitability. A report from Religare Capital Markets Ltd says the margin was further hit by the execution of low-margin strategic orders and a slowdown in production, in keeping with the lower-than-expected demand in the auto sector.
Weak revenue expansion and higher costs translated into a 25% drop in operating profit from a year back, which was significantly lower than analysts’ forecast. Net profit, too, fell 15% from a year earlier to ₹ 40.8 crore, which was not a patch on the Bloomberg consensus estimate of ₹ 61.4 crore.
At ₹ 1,397 apiece, the company’s shares trade at around 24 times the estimated earnings per share for calendar year 2016. With few firms in the organized sector having a strong hold, especially in original equipment sectors, valuations are rich. However, SKF India’s competitor Fag Bearings India Ltd posted a better performance, seeing a margin expansion in spite of a single-digit rise in net sales.
That said, some brokerage firms feel that scope for higher capacity utilization and entry into new product segments leaves room for SKF India to ride on an economic recovery, which will drive sales in both the industrial and auto segments.
The writer doesn’t own shares in the above-mentioned companies.
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