FAG Bearings Is A Compelling Long-term Investment: Sanjoy Bhattacharyya

Sanjoy Bhattacharyya, in his latest article in Forbes, has called FAG Bearings a “compelling long-term investment“. What Sanjoy Bhattacharyya likes about FAG Bearings is the fact that despite facing major headwinds in 2012, the company achieved 11 percent growth in revenues and earned an EPS of Rs 95. In other words, FAG Bearings earned a 19 percent return on equity in its toughest year during the last decade.

Sanjoy Bhattacharyya explains that another way to understand the exceptional earning power of FAG Bearings is to look at its 10-year averages for the period 2003-12. While the ROCE was 35.7%, the ROE was 25.8% and the CAGR in profits was 27.3%. All these figures are excellent and will get better with an improving macro-economic outlook and lower interest rates. FAG Bearings major customers are in the auto sector and as demand for autos will pick up, the demand for FAG Bearings’ products will also pick up, Sanjoy Bhattacharyya emphasizes.

The icing on the cake is that there is tremendous margin of safety, Sanjoy Bhattacharyya says, with a PE of only 14, Price to Book (PBV) of 2.6 and a Price to Sales of 1.6. FAG Bearings is accordingly a “compelling long-term investment” Sanjoy Bhattacharyya says confidently.

To add to Sanjoy Bhattacharyya’s analysis, FAG Bearings is debt-free and has cash of about Rs. 200+ crore in its books. It is a 51% subsidiary of the Schaeffler Group based in Germany. Also, while SKF Bearings is the largest player in the Industry and FAG Bearings is the second-largest, FAG Bearings has better margins and growth ratios and is quoting at nearly the same valuations.

So, FAG Bearings is a sound bet if you are looking for a 20-25% kind of return (which is what you should be looking at as a sensible investor).