Sustainable revenue growth along with healthy margins: SKF has registered turnover growth of 10.7% sequentially & 7.1% YoY growth for Q1FY17 owing to improved volumes. EBITDA margin has contracted by 130 bps QoQ mainly on account of 9.4% rise in raw material costs & 6.0% rise in other expenses. However, EBIT margin & Net profit margin have managed to expand by 40 bps sequentially to 13.3% & 8.6% in Q1FY17 and the same have expanded by 250 bps & 150 bps YoY.
Valuation and Outlook :Aligning with Indian accounting practices, SKF changed its accounting year from calendar year to financial year starting FY16 comprising of 15 month financials. While introducing FY18E, we also have re-visited the financials accordingly going ahead. While global growth outlook remains subdued, India is one of the few economies expected to deliver growth. Aided by strong parentage and being a market leader, SKF is well positioned to reap the optimum benefits from the much anticipated economic revival. At CMP of Rs. 1422, SKF is trading at 27.4x to its FY18E EPS. SKF, in view of auto industry revival, positive industry sentiments coupled with healthy zero debt balance sheet, is well poised to outperform its peers.They ascribe a multiple of 29.0x FY18E EPS, which is 1 standard deviation of one year forward mean PE during CY05-FY16. We recommend a “HOLD” rating for an upwardly revised target price of Rs. 1504 representing an upside potential of 6%.