H E A L T H Y Q2 F Y13 R E S U L T S

BUY

F AI RFI ELD ATL AS

H A S G R E A T P O T E NT IA L Retail Desk
13 December 2012 Company Description: Fairfield Atlas is a subsidiary of Fairfield Manufacturing Co. Inc., USA and is a part of SAURER Group of Switzerland (Oerlikon Group of Switzerland). In addition to the production of Transmission Gears, it also produces Custom Gearing and their propriety item of Torque Hubs. Fairfield Atlas manufacturers Gears and Gear System for India and overseas market. Exports constitute over 50% of sales. In the year 2000, Fairfield acquired Atlas Gear in India. The newly formed Fairfield Atlas expanded from 75,000 square feet to over 170,000 square feet and added the manufacture, assembly and painting of complete gear assemblies to the companys capabilities. In the year 2006, it was purchased by Saurer AG, the worlds leading textile machinery manufacturer. As part of this acquisition Fairfield joins the Graziano Trasmissioni Group, expanding the footprint and capabilities throughout the world. Promoters: Established in 1919 in Lafayette, Indiana, USA, Fairfield Manufacturing is a global leader and North Americas largest independent producer of gear and drive solutions for off-highway and specialty industrial machinery. Fairfield moved to its current site in 1952. The groups global presence includes manufacturing locations in Western and Eastern Europe, India, China, and North America. Oerlikon AG, one of the worlds leading high-tech industrial groups, is headquartered in Pfaffikon, Switzerland. Including Drive Systems, it operates six business segments with more than 16,000 employees at 157 sites in 36 countries. The Oerlikon Drive Systems segment integrates Fairfield and Italys Graziano Transmissioni as well as their 14 production and sales facilities. Besides Lafayette, two are in China, three in India, six in Italy and one each in Russia and the United Kingdom. In 2010, more than 16,000 employees at over 150 locations in 36 countries generated sales of CHF 3.6 billion ($2.62 billion). Manufacturing facility: At present it has two plants located at Kolhapur (Maharashtra) adjoining the city of Belgaum (Karnataka), one caters to Indian market and other EOU unit for overseas customers. Key Financial:
Year-March
H1FY13A H1FY12A FY11A FY12A FY13E

Rating CMP (`) Target Price (`) Upside (%) Key Data BSE Code NSE Code Reuters code Bloomberg Code Sensex Face Value (`) Mcap (` Cr.) 52 week H/L (`) 2 Wk Avg Qty Share holding, September 12 Promoters DIs Corporates Public Performance 3M (%) Stock-FAL -16.0 BSE 200 9.2 BSE 500 9.5 Price Chart: (One-Year)

Buy 131 170 30 520145 FFAT.BO ATG IN 19229 10 358 187/62 15000 Holding % 83.9 3.8 2.0 10.3 6M -5.1 15.3 15.3 12M 89.9 23.4 23.5

(` crore)
FY14E

http:// www.falworld.com Vijay Dave vijaydave@sunidhi.com Ph: 91-22-6760 7700

Sales PBIDT Interest PBDT Depreciation PBT Tax PAT Equity Reserves Book Value (`) EPS (`) OP Margin (%) NP Margin (%) P/E

119.6 31.8 1.4 30.4 4.3 26.1 8.4 17.7

112.7 20.0 1.6 18.4 4.2 14.2 4.2 10.0

6.5 26.6 14.8

3.7 17.7 8.9

163.7 27.2 0.8 26.4 6.9 19.4 1.8 17.6 27.3 27.9 20.2 6.4 16.7 10.8

246.5 55.9 3.2 52.7 8.4 44.3 13.3 31.0 27.3 47.5 27.4 11.4 22.7 12.6 11.5

270.0 68.9 2.8 66.1 8.6 57.5 17.5 40.0 27.3 87.5 42.0 14.7 25.5 14.8 8.9

310.0 78.7 3.0 75.7 8.5 67.2 20.8 46.4 27.3 133.9 59.0 17.0 25.4 15.0 7.7

Fairfield Atlas
FY12, Q2FY13 & H1FY13 Results During FY12, sales advanced by 50.6% to `246.5 crore but net profit rose by 76.1% to `31.0 crore. OP and NP margin stood at 22.7% and 12.6% against 16.7% and 10.8% respectively in the corresponding period last year. EPS stood at `11.4. The debt-equity ratio as on FY12 stood 0.47 Vs 0.7:1 in FY11 whereas the value of the gross block, stood at `147 crore. During Q2FY13, although sales fell 14.3% to `54.1 crore and net profit rose 19% to `7.5 crore. (YoY). OPM and NPM stood at 25.0% and 13.9% Vs 20.1% and 9.9% in Q2FY12. During H1FY13, net profit rose 77% to `17.7 crore on 6.1% higher sales of `119.6 crore. H1FY13 EPS stands at `6.5 Vs `3.7 in H1FY12. Clients FALs core business operations fall in the broad categories of agriculture, construction, automotive, energy, mining and more specifically the on-off highway power transmission sector. The customer list includes Mahindra & Mahindra, TATA Motors, Carraro (India), John Deer (India), SAME, KAMCO in India and FMC, TMA, GKN, JLG overseas and TMA in the US. Indian manufacturers of gears for these markets/industries can be classified on the basis of being an OEM supplier or a replacement market supplier or a combination of both. Currently, leading manufacturers in these industries source their gear requirements through their captive in-house facilities, if any, or from suppliers approved by them. Fairfield Atlas is one such approved and preferred supplier to OEM's in the markets mentioned above. The Indian domestic market will continue to be dominated by small cars. Replacement of commercial vehicles will boom as older vehicles get scrapped and logistics hubs emerge. As per KPMG report, vehicle penetration in India is quite small, even in comparison to other Asian countries. In passenger vehicles, for example, India has 8 vehicles per 1000 people, which is lower than countries like China and Thailand. In 2-Wheelers also, the penetration level in India at 51/1000 is low compared to Indonesia, Malaysia and Thailand. Motorcycle sales will perform positively & projected to exceed 10 million units by 2012-13. Prospects The present size of the auto components industry in India was $32 billion in 2012, which is <1% of the global auto components industry. The Indian auto parts industry has been growing at a CAGR 18% p.a. for past seven years.In tandem with the surge in vehicle production, the country's auto parts industry is aiming for a fourfold growth to around `5 trillion ($105 billion from $32 billion by 2020), according to the industry lobby Automotive Component Manufacturers Association of India (ACMA). According to the vision document, the auto components industry will require an investment of at least `1.6 trillion over the next decade to achieve the target. According to the report, jointly prepared with consultancy firm Ernst and Young, the auto parts industry is expected to contribute 3.6% to India's gross domestic product (GDP) in a decade, from 2.1% now. The market demand for construction equipment is expected to increase on account of the booming real estate and the increase in spending in urban infrastructure development, roads, general construction sectors and spending by Government on various infrastructure projects. As FAL is a supplier to the machinery connected to the construction industry future prospects on this account appear bright. In view of the confidence that Oerlikon has in the drive system overall business strategy it has approved a significant investment for these facilities in India a part of which will flow to FAL to part finance its capital expenditure and product development to support its future growth prospects. Sunidhi Research | 2

Preferred Supplier for OEMs

Low Penetration of Automobile Augurs Well

Fairfield Atlas
Opportunity Apart from its inherent reputation and capability, FAL being a unit in the Oerlikon Group, which includes Oerlikon Fairfield in USA and Oerlikon Graziano in Italy its international strategic partners presents opportunities for broadening the offering of its products. Oerlikon Graziano Italy has a presence in India viz. Graziano Trasmissioni (India) Pvt. Ltd. Consequently there are opportunities for exploring the various synergies between the two companies so as to augment and strengthen the ability to serve its domestic and international customers by making optimum use of its resources. The possible interest rate cut in the next policy meet would improve prospects of banking, housing, construction and automobile sectors. As such the auto components, depended on the automobile sector, would reap benefits. In the next meet, possibly RBI may look to tamper with the policy rates in order to respond to the deteriorating growth. The demand for FALs product is a derived demand and hence is dependent upon growth rate of its OEM customers. In the recent past the automobile industry has shown a positive growth rate, the tractor industry is also witnessing growth owing to a strong rural demand and liquidity. As the Indian economy is projected to grow it will drive greater demand for the FAL's products in the domestic market as well as exports globally. The outlook of FAL as regards to the new business proposed to be commenced in the field of engineering and consulting is encouraging and in the long could be a potential revenue earner for FAL. With that development the outlook for the company's business continues to be positive. With the growth of economy & various efforts and initiatives taken by the Government, sectors such as Infrastructure and power have picked up. With this, off-highway & construction vehicles sales also grew up by about 10% last year and are expected to maintain the momentum in coming years. Fairfield Atlas has clarified to BSE that the promoters had sought permission from the Exchange to reduce their holding to 75% of the paid up capital of the Company by sale in the secondary market so as to comply with the limit prescribed In Clause 40A of the Listing Agreement. FAL is consistently strengthening its market position in existing and certain niche segments which offer good contribution and where competition is minimal. It is committed to deliver quality engineered products on time, fully satisfying its customer requirements through a process of continuous improvement. Fairfield Atlas is an ISO/TS-16949:2002 certified. At the CMP of `131, the share is trading at a P/E of 8.9x on FY13E & 7.7x on FY14E. We recommend BUY with a target price of `170 in the medium term. Key Risk Slowdown in the automobile industry in the wake of high interest regime and slowing economy may affect the prospects of auto component industry.

Reserve Bank of India (RBI) s Focus on Growth to Sustain Economic Expansion

Valuation & Recommendation

Sunidhi Research |

Fairfield Atlas

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