by Suhani Adilabadkar

The auto slowdown over the past quarters have taken its toll on SKF India June quarter numbers, as net profit slipped 4% YoY in Q1 FY20. Driven by twin engines, Industrial and Auto, SKF India, market leader in domestic bearing industry has been a fabulous wealth creator gaining 600% over the past ten years.

Quick Takes:

• SKF India, a collaboration between AB SKF, Associated Bearing Company and Investment Corporation of India was incorporated in 1961.
• Sluggish auto growth has led to muted June quarter results with PAT shrinking and Revenue and EBDITA parameters reporting lacklustre growth.
• Exports constituting 9% of revenue basket jumped 24% YoY and 65% sequentially. 
• Amidst slowdown and EV uncertainty, SKF India’s capex plans are on track, at Rs. 80-130 cr for FY20.

Company Profile

SKF India is a collaboration between AB SKF, Associated Bearing Company and Investment Corporation of India that was set up in 1961. With its first manufacturing plant commissioned in Pune in 1965, SKF evolved from being a pioneer ball bearing manufacturing company to an integrated solutions provider. The company provides industry leading automotive and industrial engineered solutions through its five technology-centric platforms, bearings and units, seals, mechatronics, lubrication solutions and services.

The company provides sustainable ways for companies across the automotive and industrial sectors to achieve breakthroughs in friction reduction, energy efficiency, equipment longevity and reliability. As the largest player in the bearings industry, SKF holds market share of roughly 30% with more than half of revenues coming from industrial and roughly two fifth contributed by the automotive segment.

A June quarter marked by weak auto growth

Sluggish auto growth led to muted June quarter results, with a decline in PAT, Revenue and EBDITA parameters indicating lacklustre growth. Net profits reported negative growth of 4% YoY and 5% sequentially, showing Rs. 78 crore against 81 crore the same quarter last year. Revenue came out at Rs.777 crore, rising 3% and EBDITA growth was 3.4% YoY at Rs. 120 crore compared to Rs. 116 cr same period previous year. Higher share of traded goods (import and sell) with revenue mix tilted in favour of industrial impacted margins with mild expansion of just 8 bps at 15.45% compared to 15.37% in Q1 FY19.

Moving on to revenue parameters, Auto and Industrial proportion stood at 38: 53 in Q1 FY20 with auto OEM and aftermarket reporting negative growth of 14% and 5% respectively. On the other hand, Industrial segment reported stable OEM and aftermarket growth of 8% and 10% respectively in June quarter FY20. Exports constituting 9% of revenue basket jumped 24% YoY and 65% sequentially. 

Analysis

The auto slowdown has taken its toll on SKF India running across the entire  automotive OEM space. Clarifying further, Mr. Manish Bhatnagar, MD, SKF India said, “ I think cars and trucks are high single-digit early double-digits, tractors we are about a little higher double-digits shrinking as compared to last year. Overall, the entire automotive OE space is down about 14%”.

Commenting on the auto slowdown, Bhatnagar added, “The next trigger point for the automotive up cycle to start, if it does, is the festive season in end October early November. If we miss that trigger point, it moves on to Q1 2020”. Timing seems to be uncertain leading to tough and bumpy road to recovery for auto slowdown. 

But it is a relatively smoother road to drive for SKF India, with Industrial segment coming out as its saviour. Industrial constitutes various sub verticals namely, Renewable Energy (wind), Railways, Steel and Cement. Energy has grown 23% QoQ and 100 plus percentage growth YoY. Railways has grown strongly 22% sequentially with flat YoY growth. With respect to cement and steel infra linked heavy industries, the management sees clear visible growth and is expecting good performance with continued push towards infrastructure spending by the government. The company also expects industrial private capex to start in the next 3-4 months providing further impetus to industrial revenues.

Another important growth vector is Railways with Passenger, Locomotive and Freight as it’s major operational segments. SKF India has been traditionally strong in Passenger and Locomotive business, but future Railways growth will be driven by Freight segment and in this respect Mr. Bhatnagar said, “On the freight side we have had a lower share which we are now rectifying through approval of our K class bearing etc. Our share in freight today is single-digits and we hope to increase it at par with what we have in the other segments. Of course, it will take time to get there, but that is our intent. We are also in the process of starting to localize some of these bearings in India. So, you will see some benefit from there too”. 

Next in line is the service business part of industrial segment in the form of Rotating Equipment Performance solution that allows customers to maximize reliability of their rotating equipment, to optimize productivity and profitability, and reducing total cost of ownership. Currently with mid-single-digit contribution, the SKF Management aspires to take it to early 20s of total revenues, another strong growth vector for the company.

With automotive sector downhill, exports have come out better as the company utilized global opportunities to support its production levels in domestic factories, primarily automotive. Exports grew 24% YoY and 65% sequentially, making up 9% of total revenues compared to about 5-7% same period previous year.

And lastly, apart from auto slowdown phenomenon, the impending EV transition in the auto industry is also expected to impact bearing industry and its players. In this respect, SKF Management has maintained that the company is relatively immune compared to other industry players as a large part of it’s business is wheel linked, and even if the number of bearings utilized in EV vehicles is reduced, the value of bearings will go up. Amidst slowdown and EV uncertainty, SKF India’s capex plans are on track, Rs.80-130 cr for FY20. But at the end of the day, the fortunes of SKF India remains strongly tied with auto health.