On A Smooth Roll

There are quite a few companies that maintain a low profile and quietly but steadily continue to put up a decent performance year after year. Such companies are better picks due to their low valuations and the good upside they present. Menon Bearings (MBL) is one such company. In fact, after an insightful discussion with the company’s CFO, Suhas Kulkarni, we believe that the scrip does merit a second look. MBL manufactures three types of products i.e. the bi-metal bearings, bushes and thrust washers. These products, which are fitted inside an engine block, perform the function of reducing wear and tear load of crankshaft due to friction between crankshaft and engine body. Through these products MBL mainly caters to the automotive segment, which generates 90 per cent of its revenues. Its products also find application in compressors, refrigerators and air-conditioners, which bring in the balance 10 per cent. MBL has a good mix of revenues wherein its 20-25 per cent of revenue is derived from the replacement markets, 40 per cent is through OEMs and the balance 40 per cent from exports. This diverse revenue stream helps MBL derisk its business as there is no major dependence on any single segment. Second, MBL’s products have high entry barriers as OEMs are averse to changing the bearing supplier since it’s a very critical component in an engine and replacing one new bearing requires more than 10,000 hours or more than a year of testing to get the final approval - a lengthy process indeed.
Third, MBL has an enviable list of clients, which includes GM, Tata Motors, Cummins, John Deere, Maruti Suzuki. These companies make up for 60-70 per cent of the revenues. MBL is a single source vendor for John Deere, Maruti Suzuki and Tata Motors in some applications. Thus any increase in demand from these customers benefits MBL directly. The management has also stated that the demand, both on the domestic as well as international front is buoyant, and has been witnessing an uptrend. To cater to this increasing demand, MBL is raising its capacity by more than 30 per cent with a capex plan of Rs 5 crore to be funded through internal accruals and debt and will be executed during next two years. This would push MBL’s revenues to another trajectory altogether. If that wasn’t enough, MBL, which had flat realisations in FY10, is now negotiating for a price hike of at least 10-15 per cent.   The management is optimistic about it and if this is successful it will increase MBL’s growth rate further. On the financial front, for 9MFY10 MBL’s revenue increased by 26.26 per cent to Rs 39.80 crore (Rs 31.52 crore), while profits dipped by 18 per cent to Rs 3.66 (Rs 4.47 crore) on account of higher tax provision. The management expects to close FY10 with revenues and profits of Rs 55 crore and Rs 7 crore respectively. At these estimates, MBL is available at a PE of a mere 4.9x compared to its peers Bimetal Bearings’ 10x and Federal Mogul’s 11x. On EV/EBDITA to MBL is available at just 4.6x. Besides, a consistent dividend track record, high dividend yield of 3.5 per cent and the fact that the scrip underperformed the broader markets are factors which will help MBL catch up with the valuations. This scrip therefore is worth buying at Rs 40 with a target price of Rs 50.