Recommendation from Auto Ancillaries - Bearings

This section gives a recommendation of a stock having a stock price below Rs 150 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

MENON BEARING: ON A PROFITABLE ROLL

HERE IS WHY
✓  Strong market share in bearings
✓  Increasing demand from automotive sector
✓  Good growth in profit

The Indian automobile sector is expected to experience robust growth in FY24, driven by domestic demand, positive export outlook and new product introductions. The export outlook is positive due to increased demand for Indian cars and motorcycles in overseas markets. The global bearing market is predicted to increase at a CAGR of 10.6 per cent from 2023 to 2030, with a value of USD 111.59 billion in 2022. Bearings are utilised in a broad range of sectors, including vehicles, farm equipment, home appliances, defence and aerospace. The market is being driven by rising demand for bearings that require less maintenance, are more efficient and have a longer service life.

Given these factors, our choice for low price scrip is Menon Bearing Ltd., which manufactures a whole range of bi-metal engine bearings, bushes and thrust washers for light, medium and heavy automobile engines, two-wheeler engines as well as for compressors, refrigerators and air-conditioners. The company’s main business is bearings, accounting for 75 per cent of revenue. The bearings section manufactures and sells various types of bearings, catering to OEMs in automotive, manufacturing and infrastructure industries. The business of Menon Alkop accounts for 25 per cent of sales. It produces and distributes aluminium die-cast components, catering to OEMs in automotive, construction and electrical equipment industries. 

Menon Bearings is expanding its product line by launching a new car component production line, manufacturing ecoantifriction materials like brake lining and shoes. The project will be funded through internal accruals and debt. The company has three production plants in Kolhapur in Maharashtra and a warehouse and office in Indianapolis, Indiana. The company plans to invest ₹30 crore in equipment and machinery until FY25, with 30 per cent for the bi-metal division and the rest for other purposes.

In Q4FY23, Menon Bearing’s consolidated revenue rose by 8.50 per cent sequentially to ₹53.87 crore compared to ₹49.65 crore. Its PBIDT excluding other income increased by 9.86 per cent to ₹13.73 crore compared to ₹12.49 crore from the same year previous quarter. Net profit stood at ₹9.18 crore compared to ₹7.75 crore, a sequential growth of 18.48 per cent. Net profit margin grew by 143 bps QoQ and stood at 17.04 per cent.

At TTM, Menon Bearing is trading at a PE of 24.2x, which is slightly higher than its three-year median PE. The company has maintained a three-year healthy ROE and ROCE of 23.6 per cent and 27.1 per cent, respectively. The company has a three-year compounded sales and profit growth of 16 per cent and 31 per cent, respectively. The company has a debt-to-equity of 0.11x with an interest coverage ratio of 15.6x. 

India’s automotive sector is a major consumer of bearings with increasing demand from the passenger, commercial and two-wheeler automotive segment. The expanding manufacturing sector and government’s focus on manufacturing activities are expected to create new opportunities for the bearing segment in FY23. The infrastructure sector, including roads, railways and power plants, is also expected to contribute to the growth of the bearing segment. The future outlook for the bearing segment in India is positive with the growth of these sectors driving the demand for bearings in the coming years. Considering all these factors, we recommend BUY.