Things have never been so bad for the bearing industry. Except for Tata Timken, stocks of all the bearing companies have been regularly piercing new lows. Consider this - SKF Bearing is available precariously close to its four-year low. Antifriction Bearings is trading at its six-year low. FAG Precision and Bimetal Bearings both recently pierced their respective four- year lows. NRB Bearings recently dipped to a new 52-week low of Rs 53 in September, before recovering marginally to its current traded price of around Rs 61.

One does not have to search hard for understanding the waning investor interest in these stocks. The current plight of the user industries, namely, automobiles, auto ancillaries, electrical machinery and textile machinery, is well known. Given the deplorable offtakes from these end-user industries, manufacturers have had little option but to cut back on production. Thus, two factors, a slowdown in demand from these sectors and an accumulation of cheaper importedbearings, have affected offtakes from the bearing industry.

Further, the high component of imported raw material consumed by the sector have been making a considerable dent in operating margins. Bearing manufacturers need to import better grades of steel for manufacturing bearings, which are high-precision components with heavy-duty applications (especially those used in auto components and textile machinery). During 1996-97, while SKF imported 33 per cent of its raw-material requirement, the same figure stood at 41 per cent and 16 per cent for NRB Bearings and FAG Precisions respectively. The foreign-exchange exposure and the consequent burden has increased with the depreciation of the rupee.

Under these circumstances, it is difficult to understand the opposition by financial institutions and banks to the preferential issue of FAG Precision Bearings in October 1997. FAG Kugelfischer AG in October 1997 had agreed to a preferential issue priced at Rs 77 to hike its stake in the Indian subsidiary from 39.99per cent to 51 per cent. The price of the scrip at that time was trading around the Rs 66 levels. As per company sources, both FIs and the banks had thwarted the proposal then sighting some internal government guidelines.

However, funding needs have now forced FAG Precision India to tone down its offer to the German parent at Rs 40, which is a mere Rs 4 over the current market price. With the EGM for the approval of this preferential issue slated in the first week of November, the entire exercise could well prove to be an exercise in futility, especially since there should be considerable doubt on the FIs and banks agreeing to the offer at Rs 40, when they rejected it at Rs 77.

FAG (India) has clearly lost out on mobilising cheap funds due to the attitude of the FIs and banks. For the future, a revival in all the consuming sectors is required, with special impetus from the automobile and auto-ancillary sectors (which comprise 60 per cent of the market for bearings), for a revival in the bearings industry.Until such time, bearing stocks will continue to create record lows.

Cheminor Drugs

Cheminor Drugs' strong focus on the regulated markets in Europe has insulated it from the intense price competition in the product markets. The realisations from generic drugs drop by more than 10 times the moment the drug comes off the patent. With assured offtake from minority shareholder Schein Pharma (subsidiary of Bayer AG), and other major bulk clients outside India, the company manages to avoid the competition, which translates into better results.

In the second quarter of the current financial year, the topline increased by 70 per cent, while the bottomline increased by 416 per cent, compared to the corresponding period last year. This is due to the introduction of Ranitidine form 1 after its patent expiry in 1997, and Naproxen in the same year. The new capacity for manufacturing 8.28 lakh kg of bulk drug and intermediates was set up in the in the second half of last year. The increased capacityutilisation has resulted in higher sales this year.

The second quarter has been better than the first for the following reasons. First, the company was able to reverse the trend of lower domestic sales. In the first quarter the domestic sales had fallen by 24 percent to 12.8 crore. In the second quarter domestic sales have risen to Rs 14.39 crore, an increase of 22 per cent. This has translated into higher earnings for the company.

Second, the net margins at 7 per cent are more than thrice that recorded in the first quarter at 1.98 percent. The increase in margins is predominantly due to the 100 per cent rise in export sales. With the major products produced by the company coming under the Drug Price Control Order (DPCO), the higher export sales helped the company offset the lower realisations in the domestic market. Further, the higher export sales have also resulted in a reduced tax rate for the company. The higher interest outgo is due to the reduced amount of interest capitalised on account ofcompletion of the project.

In spite of the dilution of the equity by Rs 3 crore, due to the preferential allotment of shares to Schein in June 1998, earnings per share have increased. The EPS on an annualised basis works out to Rs 0.96 per share compared to less than Rs 0.62 in 1997-98. All this has meant that the stock has continued to outperform the Sensex and is trading at Rs 158, which is close to its 52-week high.

(With contributions from Percy Dubhash & Manish Saxena)