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Implementation of stricter emission rules may pinch those who want to buy new vehicles, but for bearings companies, it is turning into an incremental revenue driver.
FAG Bearings, India’s largest supplier of bearings to the passenger car segment, is well poised to benefit from increased demand for next-generation bearings which contribute to lower emissions by improving vehicle performance.
FAG Bearings, promoted by Germany’s Schaeffler Group, may outpace the industry as well as its own historical performance in revenue growth in the next few years. Between 2010 and 2015, its annual growth was 10% with revenue expanding to Rs 1,707 crore, as per company’s annual report.
With the deadlines on the emission rules — April 2017 for BS-IV and April 2020 for BS-VI — drawing closer, automakers are expected to shift to next generation bearings, opening up a revenue opportunity for the component makers. FAG Bearings is expected to reap the highest benefit since it is the market leader in the passenger car segment where volume visibility is the highest among all the automobile segments — its market share in the passenger car segment is expected to increase to 18.9% in 2020 from 16.7% in the last fiscal, according to Kotak Institutional Equities. FAG Bearings’ overall revenue market share was nearly 15% in the last fiscal year.
Its financial year ends in December. Since the new generation of bearings are almost 2.5-3 times expensive than the conventional ones, the changes will help the company better its average realisation as well as margins.
According to analysts, the bearings content will increase to Rs 4,000 per car in 2020 from Rs 3,000 currently, another factor that bodes well for the segment. FAG Bearings enjoys superior market position compared to its peers due to lower sourcing of goods from the parent to sell in the local market and better margins on traded goods.
FAG Bearings has commissioned a new plant at Savli in Gujarat with an investment of Rs 400 crore and it has potential to generate Rs 1,000 crore in revenue at peak utilisation. With higher utilisation of the new plant and increased proportion of the newgeneration bearings in its product mix could help the company boost its margins. Last year, its operating margin was 17.7%.
Also, the company would benefit from an expected increase in the use of technologically better bearings in trucks and the railways. The government’s plan to upgrade railway infrastructure by projects such as dedicated freight corridors, high-speed trains and metros in major cities can nearly double the demand for bearings from the railways. This may bode well for companies in the sector.
At Friday’s closing price of Rs 4,182.85 on the BSE, the stock is trading at 23 times its FY18 projected earnings. This is at par with tier one automakers and appears justified due to the company’s superior earnings growth and market position to capture the changing trends in the industry.
| Product Model | Inside Diameter | Outside Diameter | Thickness |
| 628-ZC3 bearing | 8 | 24 | 8 |
| 628-ZZC3 bearing | 8 | 24 | 8 |