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Business Standard
27-06-2025
- Automotive
- Business Standard
Auto component sector: Listed bearings makers have a strong outlook
Bearings outperformed other segments in the auto component sector in the fourth quarter of 2024-25 (Q4FY25). Three major listed bearing biggies — Schaeffler India, SKF India, and Timken India (Timken) — saw their earnings get upgraded for FY26 and FY27 given the Q4 show, and the prospects for the sector going ahead. The three stocks have generated higher returns than their peer/broader indices over the last three months, with Timken leading the chart, registering gains of 23.5 per cent. The average returns for the bearing companies over this period has been 20 per cent, which is twice that of BSE 200 and BSE 500. The BSE Auto index, too, has lagged behind with returns of 12.7 per cent. Aggregate revenues of bearing companies grew 9 per cent year-on-year (Y-o-Y), driven by strong growth in the railway segment (Timken), an uptick in the aftermarket division (Schaeffler and Timken), robust growth in two-wheeler production volumes (SKF), and a recovery in export revenue (Schaeffler), says Kotak Research. Revenue growth for the bearing majors was led by Schaeffler, which posted an uptick of 16 per cent Y-o-Y. While SKF put up a flattish performance, Timken's sales were up 5 per cent over the year-ago quarter. Schaeffler's growth was driven by a 13 per cent increase in the automotive technologies business. Other growth contributors for the company were exports, which grew 23 per cent on a low base, vehicle lifetime solutions (up 12 per cent), and a 12 per cent increase in the bearing business. SKF disappointed on the revenue front with a 2 per cent growth in the industrial segment, and 1 per cent growth in the automotive segment. What dragged the overall show was a 13 per cent decline in the export segment due to weak demand trends in the European Union (EU) and the Americas. In addition to one-time gains, Timken's revenue growth was on account of a high single-digit increase in the railway and process industries segment while replacement, commercial vehicles, and export segments saw a low single-digit growth. Centrum Research highlights that domestic bearing demand remained strong across companies, driven by healthy momentum in railways, automotive (especially tractors, small commercial vehicles, and sports utility vehicles), and industrial segments like food & beverage, and infrastructure. While Timken and Schaeffler saw strong domestic traction, export demand stayed weak for Timken and SKF due to global macro headwinds, though Schaeffler saw a rebound led by the Asian markets, says Amit Dhameja of the brokerage. The operating performance of the bearing majors was also healthy. The operating profit of the trio was up 20 per cent Y-o-Y due to favourable transfer pricing, and a richer product mix, points out Rishi Vora of Kotak Research. As a result, net profit grew 20 per cent Y-o-Y. Centrum Research points out that bearing companies saw stable-to-improving margins despite input cost pressures and an unfavourable product mix. Margin resilience was driven by localisation, backward integration, operating leverage, and pricing actions while select one-offs and disciplined cost control further supported profitability. While operating profit margin of SKF was up 573 basis points (bps) Y-o-Y to 23.5 per cent, it expanded 89 bps for Schaeffler to 19 per cent, and 19 bps to 22.3 per cent for Timken. Underlying sector growth, strong order book, and localisation are expected to help bearing companies grow and improve margins going ahead. The top picks for Centrum Research are Timken and Schaeffler led by growth in sectors like railways, wind, and steel, in addition to focus on localisation. For Kotak Research, Timken and SKF are top picks. For SKF, growth in the medium term should be driven by an increase in bearing content in the railway segment, a pickup in the industrial segment, and a steady performance in the automotive segment. For Timken, the triggers are domestic railways market, exports, and the upcoming new manufacturing plant for spherical and cylindrical roller bearings.
Economic Times
25-06-2025
- Automotive
- Economic Times
ABS for below 125 cc two-wheelers to impact Hero Moto, TVS margins most; Endurance to benefit: Rishi Vora
Synopsis The Indian two-wheeler market faces challenges as it recovers from pre-COVID levels. Proposed ABS mandates for sub-125cc vehicles could increase costs, impacting Hero MotoCorp and TVS, while benefiting Endurance Technologies. Rare earth magnet shortages pose further risks, potentially leading to production cuts, especially in the EV sector. Passenger vehicle segment is preferred over two-wheelers due to valuation concerns. Rishi Vora, Associate V-P, Kotak Institutional, says the Indian two-wheeler market is still recovering from pre-COVID levels, posing challenges for manufacturers. Making ABS must for below 125 cc two-wheelers, will significantly impact Hero MotoCorp and TVS due to potential cost increases, affecting their margins. Endurance Technologies, a key player in the ABS market, stands to benefit from the anticipated five-fold growth in the ABS market due to new regulations. ADVERTISEMENT What is your take on the two-wheeler counters because the latest concern in the two-wheeler stocks is over reports suggesting that the transport ministry may approve the anti-lock braking systems (ABS), in two-wheelers from CY2026. Has this been a long-standing demand from the industry or is the timing a bit of a surprise? Rishi Vora: if you look at the ABS norms, it already existed in the above 125cc two-wheeler segment for the last five years. Globally, these are not the norms for under 125cc two-wheelers. So, if it happens, it will be first of its kind for the two-wheeler sector. Now, at least from an OEM perspective, it would not be appreciated given that there will be a decent cost increase which will have some detrimental impact on the overall demand. So, the OEMs will at least suggest to the government that this can create further headwinds for the sector and they will try to delay this. Obviously from a government perspective, it is more about safety. The government has been reported to have said that almost 44% of the road accidents involve two-wheelers. So, it is more in keeping with the safety of the riders in mind and hence they are going for stringent safety norms for the two-wheeler segment. Yes, it is negative from the demand perspective. But from a consumer perspective, the government is focusing more on the safety aspects. Can auto companies take a price hike whatever the incremental cost is loaded up on the product? Rishi Vora: Last time in 2020 when this norm was implemented for above 125cc two-wheelers, there was Rs 4,000 to Rs 8,000 price increase depending on single channel or dual channel ABS and over time they passed it on. Now, again if this rule gets implemented, then there will be anywhere between Rs 3,000 and Rs 5,000 cost increase as per our estimates, which is roughly 5% of the vehicle ex-showroom price. So, over time, they will be able to pass it on. But it might have some impact on demand at least in the near term when this happens. If they take a price hike, how much could that affect demand? If they do not take a price hike, how much could that affect the financials of these companies? Rishi Vora: As I discussed, Rs 3,000-5,000 is the approximate cost increase that will happen. So, assuming they pass it on in one go, a 5% cost increase in the entry-level – 110cc, 125cc motorcycle segments, there can be a 5-7% decline in the segment which gets impacted. So, yes, there is a good amount of headwind which the sector will have to face and we have to keep that in mind. If we look at the domestic two-wheeler market in FY2025, the industry volumes ended at around 20 million which is still below the pre-COVID peak. So, it is not like the two-wheeler industry has surpassed the pre-COVID peak and that is another challenge. So, this can be an incremental headwind. If they decide to take a hit and not pass it on to the customers, each company will have a different impact, given what part of their portfolio gets impacted. As per our analysis, Hero will be the most impacted. ADVERTISEMENT In the case of Hero MotoCorp, almost 94% of their portfolio will go through a cost increase, followed by TVS where around 64-65% will be affected. If they do not pass it on, there can be an impact of anywhere between 50 to 100 basis point on their margins. If somebody wants to buy a three-wheeler, you will have to buy these new norms. It is like wearing a seat belt, wear it or pay chalan. So, why will demand get impacted because for those who want to buy a two-wheeler, it is a need-based product and the safety measure are compulsory. Why should this impact demand just because there is a Rs 3,000 additional load up? Is this market that sensitive? Rishi Vora: Yes, it is right. Again, OEMs will have to comply with this norm if it comes into effect and then cost increases will take place. A 5% cost increase in a price sensitive segment has a detrimental impact on demand. So, there will be some immediate impact. Over time, it will get absorbed, but it might take a year or one-and-a-half years before things start to normalise. ADVERTISEMENT What about the other side of the spectrum, the players who operate in the ABS supply chain band? How will they be impacted by this news flow? Will it be very incremental? Rishi Vora: Obviously Bosch is the largest player in terms of market share within ABS. But again, that is an unlisted entity and not a listed one. The ABS part sits in the unlisted segment. Beyond that, there is Continental and Endurance Technologies. So, yes, among the listed names one of the major beneficiaries would be Endurance Technologies. They roughly have around 10-15% market share right now in the ABS market. If this norm comes through, our assessment is that the ABS market in India will increase almost five-fold from roughly Rs 2,000 crore today to 5x growth over the coming years. So, even if we assume that Endurance Technologies maintains a similar kind of market share, it is going to be a decent tailwind for them in terms of demand uptake. ADVERTISEMENT The other concerning factor for the auto space right now is the whole shortage related to the rare earth magnet issue. We have been talking to a lot of these companies as well as suppliers. The companies have been saying that they have the stocks only till July and August. How do you see the situation right now and how do you see this situation getting worrisome? Rishi Vora: Again, as things stand today, none of the OEMs have gotten approval from the Chinese government for lifting the restrictions on rare earth material. It continues to remain a lingering issue for the sector. Now, obviously some OEMs have or suppliers have two-three months of inventory; some have a month's inventory. So, within a month's time, we will start seeing issues or production cuts pertaining to the shortage of rare earth materials. The first sector in general which will be affected will be EVs because the motor uses permanent magnets and that is a very direct impact and the dependence on China is extremely high over there. So, the EV sector will get impacted firsthand. So, all the companies – some earlier, some later – which cater to the EV segment will eventually get impacted. The good thing is that once the approvals come through, the magnets or rare earth materials can be airlifted and production restarted,within one to two days. So, that is a good thing and no freight related time wastage will happen once the approval comes through. But yes, right now, everybody is discussing it with the Indian government. The Indian government is trying to get in touch with China and trying to resolve this issue, but that is something that needs to be watched out over the next one to two months. If it does not get resolved, then we will see some production cuts starting with the EV segment and maybe then it can flow through to the ICE passenger vehicle segment as well. But that will take at least a couple more months. ADVERTISEMENT Given that most of the two-wheeler companies have corrected anywhere between 30% and 40% in the past one year, is anything looking attractive to you purely on the valuation front, and not just from two-wheeler but the passenger vehicles and tractor companies as well? Rishi Vora: We have seen some corrections, especially after the festive period last year and it is predominantly because of very sharp deceleration in demand. In the first half of FY25 domestic two-wheeler demand was growing in low-teens and then, suddenly the industry growth came down to a flattish number. That resulted in a negative surprise overall. In terms of what we like, we continue to prefer a passenger vehicle segment over two-wheelers as we believe it is still on the two-wheeler side, valuations are expensive and the industry growth would be lower than what Street is expecting at this point in time. Within passenger vehicles, our preferred pick is Mahindra & Mahindra, Hyundai Motors, and Maruti Suzuki. 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Mint
29-04-2025
- Automotive
- Mint
TVS investments in loss-making UK arm Norton spark analyst concerns
TVS Motor Company Ltd's investments into its loss-making United Kingdom-based subsidiary Norton continues to concern analysts who expect that the company is still far away from generating meaningful revenue. India's third-largest two-wheeler seller's management highlighted during the post-Q4 results earnings call on Monday that the company will focus on developing new product range for Norton, which is expected to hit the markets by the end of the current fiscal year. At least two brokerage firms highlighted that the investments into the subsidiary are weighing on the overall performance of TVS, while a third analyst noted that meaningful revenue from Norton will only come in the second half of financial year 2027. 'Capital allocation remains a concern. TVS has heavily invested in foreign subsidiaries. Over the last five years, these investments have grown at ~25% CAGR,' analysts at Nirmal Bang wrote in a 29 April note. 'On a cumulative basis, these subsidiaries have been making losses with the bulk of the losses booked in Norton and SEMG.' Norton was acquired by the Hosur-based company in 2020 in an all-cash deal for ₹ 153 crore. Since taking over the motorcycle brand, TVS has invested more than ₹ 1,000 crore into the company. In 2021, it opened a new plant in Solihuli, UK, with a capacity to produce around 8,000 motorcycles annually. Through these investments, TVS wanted to create products for the global market through the Norton brand. However, losses have piled up. Ebit (earnings before interest and taxes) losses from subsidiaries, which includes Norton but excludes TVS Credit, stood at ₹ 140 crore in 4QFY25 versus ₹ 91 crore in 4QFY24, according to a 29 April note released by Kotak Institutional Equities. TVS did not respond to Mint's emailed queries. Analysts at Kotak Institutional Equities also noted that free cash flow generation of the company, or the cash generated by its business, saw a sharp decline of 83% to reach ₹ 230 crore due to capital expenditure and investments nearly doubling to about ₹ 4,000 crore in financial year 2025. 'Increased losses from subsidiaries (excluding TVS Credit) need to be monitored,' Rishi Vora of Kotak noted. 'The company continues to incur losses on the Norton Motorcycle subsidiary as it continues to undertake costs of the development cost of TVS Motor.' To be sure, this is not the first time the company is facing tough questions on the viability of its UK-based business. Faced with persistent questioning by analysts in the October 2023 earnings call, the management of the company had put up a brave face. TVS CEO K.N. Radhakrishnan had expressed confidence in Norton's ability to generate profits earlier. "You give me a few more quarters, Norton will start delivering very good results for the company," Radhakrishnan said in October 2023. Large share of investments is going into product development for Norton. The first new product under development is expected to hit the market by the end of this financial year. But some believe the company is still far from generating meaningful revenue. In a note dated 29 April, analysts at Axis Securities wrote that increased investments have muted the company's free cash flow. 'We estimate Norton's business to be able to generate meaningful revenues by H2FY27,' Shridhar Kallani of Axis Securities wrote in the note. TVS reported its earnings on Monday, in which it beat estimates. During the January to March period, the company saw its net profit jump 76% to ₹ 852 crore, from ₹ 485 crore in the year-ago period. Total revenue during the period grew 17% to ₹ 9,565 crore, from ₹ 8,140 crore a year ago. For the full year, its profit grew by over 30% to reach ₹ 2,710 crore, while revenue rose 14% to ₹ 36,309 crore. During the year, it also recorded the highest-ever sale of 4.7 million units of two-wheelers in the country. But the better-than-expected performance of the company was not able to impress investors. On Tuesday, TVS shares closed 3.4% lower as against a 0.24% fall in Nifty Auto. First Published: 30 Apr 2025, 05:00 AM IST
