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NRB Bearings

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Valuation recommendation and key investment considerations

Recommendation: BUY

Analysis from both intrinsic valuation and relative valuation highlight that at current levels NRB Bearings offers a

significant upside

Key investment highlights:

#4 bearings manufacturer in the organized bearings market

Market leader in needle roller bearings with ~70% market share

Continued high investment to support organic growth

Increasing focus on exports market (high margin business) and industrial components market (currently comprises

primarily of imports)

Attractive industry growth estimates (as per ACMA):

o Auto Components industry growth CAGR 2011-21: 11.0%

o Auto Components industry exports growth CAGR 2011-21: 18.8%

Key investment concerns

Rising raw material costs, which may put some pressure on the margins in the short-term

Exposure to foreign currency risks

Significant employee costs as compared to peers

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Industry overview

Indian organized ball bearings sector worth INR 45 billion

and has seen healthy growth

o The sector increased by 13% for the year 2011-12

Domestic industry satisfies 75% of the demand, the balance

25% is met through imports

o International manufacturers have established units in

India through joint ventures or 100% ownership

Industry overview

Growth in key drivers of the sector Industry structure

Bearings industry

Unorganized ImportedOrganized

~37.5% ~37.5% ~25%

Historically buoyant growth witnessed in the automotive industry, the largest consumer of quality bearings, across all segments

o Indian government’s Automotive Mission Plan 2016 to facilitate high growth for the sector

o Targets of doubling of the automotive industries contribution to the Indian economy between 2006-2016

Infrastructure spending in the 12th Five Year Plan expected to double to US$ 1 trillion

Investments in roads, railways and power generation will result in a multiplier effect across the core sectors

Key sector highlights

ReplacementSpecial purpose

bearingOEM

CAGR CAGR2008-12 2012-21

Passenger vehicles growth 14.0% 13.0%Commercial vehicles 22.0% 11.0%Tractors NA 6.0%Two & three wheelers 16.0% 7.0%Construction vehicles NA 14.6%

CAGR CAGR2007-11 2011-21

Auto components 14.6% 11.0%Auto components - Exports 11.0% 18.8%

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NRB70.0%

Others30.0%

Auto79.0%

Industrial

6.9%

Exports14.1%

OEM66.9%

After-market19.0%

Exports14.1%

NRB Bearings - Company profile

NRB operates in the ball and roller bearing business

Offers c.3,000 customized products to its diversified client base in the Auto OEM’s and after market segments

Products find applications in Auto, tractors & farm equipments & Off highway vehicles

Customers: Well-established relationships with some major OEMs with top five customers including Tata Motors, Hero Honda, Ashok Leyland, M&M, and Bajaj Auto

o Diversified client base with no single customer accounting for >10% revenues

o Global clientele includes Daimler, Volvo and VW

Company overview Sales breakdown (FY2011/12)

Market positioning Organization

NRB Bearings

NRB Industrial Bearings (NIBL)

NRB Bearings (Thailand)

SNL Bearings

73.5% 100% 100%NRB12.0%

Others88.0%

Mkt. share of organized bearings industry

Mkt. share of needle roller bearings

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NRB Bearings - Company profile (cont’d)

Industrial bearings

NRB incorporated NIBL in February’ 2011 to manufacture

bearings for the industrial sector

NIBL is expected to commence manufacturing industrial

bearings from October, 2012

NRB to also transfer its industrial bearings operations to

NIBL

Company’s new plant in Aurangabad to cater its industrial

segment is expected to go on-stream and start contributing

slowly from current fiscal

NRB expects to increase its industrial bearings market share

in the next 2-3 years through new plant

Exports

Company plans to focus more on the exports

Revenue contribution from exports expected to increase to

20% over the next 2-3 years

Operates 8 manufacturing plants (7 domestic and 1 in Thailand)

Recent developments Manufacturing footprint and locations

Location Year Products manufactured

Thane 1966Textile bearing, Thrust bearing, steering bearing, Needle bushes, Needle cages

Aurangabad 1978 Needle rollers

Jalna 1982

Rocker arm bearings, Textile bearings, Taper roller bearings, Ball bearings, Sperical and Cylinderical ball bearings

Ranchi 1983Needle rollers, Needle cages, Full compliment shell bearings

Waluj 1991Big and small end bearings, Grease retained bushes, Full complimented bushes

Hyderabad 1992 Thrust bearings, on rod kits, Cages

Pantnagar 2008Ball bearings, Needle roller bearings, Cylindrical roller bearings

Thailand 2007Spherical bearings, Tapered bearings, Cylindrical roller bearings , Needle cages, Roller cages

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22.1% 20.6%

19.5% 19.3% 19.8%

16.1% 15.6% 17.2%

16.0% 14.3% 14.0% 14.7%

11.1% 10.3% 12.0% 10.5% 9.6%

8.3% 9.0% 8.8% 7.8%

12/31/2010 03/31/11 06/30/11 09/30/11 12/31/11 03/31/12 06/30/12

EBITDA margin EBIT margin Net income margin

38.0% 36.1% 35.0% 40.5% 35.1% 38.3% 35.7%

24.0% 26.6% 28.3% 23.8% 28.8% 30.0% 32.5%

16.0% 16.7% 17.2% 16.4% 16.3% 15.6% 16.2%

12/31/2010 03/31/11 06/30/11 09/30/11 12/31/11 03/31/12 06/30/12

COGS as % of sales SG&A as % of sales Employee expenses as % of sales

NRB Bearings – Historical quarterly performance analysis

Note: Figures for NRB on a standalone basis. NRB revenue figures exclude other income (considered non-operational).

Quarterly development of NRB expenses

Margin development relative to peersQuarterly development of NRB margins

Quarterly expenses relative to peers

as % of sales 12/31/10 3/31/11 6/30/11 9/30/11 12/31/11 3/31/12 6/30/12

COGSNRB Bearings 38.0% 36.1% 35.0% 40.5% 35.1% 38.3% 35.7%SKF India 55.2% 56.0% 56.0% 57.6% 61.1% 61.1% 62.8%FAG Bearings 64.3% 63.7% 100.8% 64.3% 65.2% 65.5% 64.3%ABC Bearings 49.1% 50.7% 47.5% 44.4% 51.0% 47.6% 39.3%

SG&ANRB Bearings 24.0% 26.6% 28.3% 23.8% 28.8% 30.0% 32.5%SKF India 16.8% 16.2% 15.9% 15.0% 13.0% 13.9% 13.1%FAG Bearings 16.7% 15.4% 16.5% 16.2% 16.7% 13.3% 17.6%ABC Bearings 20.0% 16.6% 24.7% 26.7% 22.9% 25.0% 30.1%

Employee expenseNRB Bearings 16.0% 16.7% 17.2% 16.4% 16.3% 15.6% 16.2%SKF India 8.3% 7.4% 8.2% 7.5% 7.8% 7.4% 7.3%FAG Bearings 7.5% 6.4% 6.5% 6.4% 7.8% 6.6% 7.8%ABC Bearings 8.5% 6.5% 9.6% 10.2% 8.7% 13.1% 14.0%

% margins 12/31/10 3/31/11 6/30/11 9/30/11 12/31/11 3/31/12 6/30/12

EBITDANRB Bearings 22.1% 20.6% 19.5% 19.3% 19.8% 16.1% 15.6%SKF India 19.6% 20.5% 20.0% 19.8% 18.1% 17.5% 16.8%FAG Bearings 11.5% 14.5% (23.8%) 13.1% 10.3% 14.5% 10.4%ABC Bearings 22.4% 26.2% 18.2% 18.7% 17.4% 14.3% 16.6%

EBITNRB Bearings 17.2% 16.0% 14.3% 14.0% 14.7% 11.1% 10.3%SKF India 17.7% 18.7% 18.4% 18.1% 16.3% 15.8% 15.1%FAG Bearings 9.9% 13.1% (25.4%) 11.5% 8.7% 12.8% 8.5%ABC Bearings 20.2% 24.5% 14.8% 14.6% 13.7% 10.9% 11.8%

Net incomeNRB Bearings 12.0% 10.5% 9.6% 8.3% 9.0% 8.8% 7.8%SKF India 12.7% 13.8% 14.1% 13.6% 12.3% 12.7% 12.2%FAG Bearings 8.1% 9.6% 8.6% 9.2% 6.7% 11.3% 8.1%ABC Bearings 13.8% 16.0% 9.6% 10.6% 9.4% 5.6% 7.2%

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NRB Bearings – Financial summary(in INR millions except per share data)

FYE 3/31 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Net revenues 4,796 5,600 6,605 8,131 10,085 11,351 12,787 14,415 16,265 18,367 20,760 % growth 34.6% 16.8% 18.0% 23.1% 24.0% 12.6% 12.6% 12.7% 12.8% 12.9% 13.0%

Cost of goods sold 1,545 1,894 2,333 2,847 3,501 3,907 4,363 4,875 5,501 6,212 7,021 Gross income 3,251 3,706 4,272 5,283 6,583 7,444 8,424 9,540 10,764 12,156 13,739

% margin 67.8% 66.2% 64.7% 65.0% 65.3% 65.6% 65.9% 66.2% 66.2% 66.2% 66.2%

SG&A expenses 1,311 1,627 1,874 2,307 2,861 3,221 3,628 4,090 4,615 5,211 5,890 Employee expenses 853 941 1,189 1,463 1,815 2,043 2,301 2,594 2,927 3,306 3,736 EBITDA 1,087 1,138 1,209 1,513 1,907 2,181 2,495 2,856 3,222 3,639 4,113

% margin 22.7% 20.3% 18.3% 18.6% 18.9% 19.2% 19.5% 19.8% 19.8% 19.8% 19.8%

Depreciation & amortization 240 293 353 434 539 607 683 770 869 981 1,109 EBIT 846 845 856 1,079 1,368 1,574 1,812 2,086 2,353 2,657 3,003

% margin 17.6% 15.1% 13.0% 13.3% 13.6% 13.9% 14.2% 14.5% 14.5% 14.5% 14.5%

Interest expense 65 148 200 210 228 219 187 163 155 149 143 Other (income) / expenses (35) (36) (18) (22) (28) (31) (35) (40) (45) (50) (57) Profit before tax 816 734 675 891 1,168 1,387 1,659 1,962 2,243 2,559 2,917

% margin 17.0% 13.1% 10.2% 11.0% 11.6% 12.2% 13.0% 13.6% 13.8% 13.9% 14.1%

Tax 268 225 204 269 353 419 502 593 678 773 882 Profit after tax 547 509 471 622 815 967 1,158 1,369 1,565 1,785 2,035

% margin 11.4% 9.1% 7.1% 7.6% 8.1% 8.5% 9.1% 9.5% 9.6% 9.7% 9.8%

Parent company’s share 535 499 462 609 798 948 1,135 1,341 1,534 1,750 1,995 Minority 12 10 9 12 16 19 23 27 31 36 41

EPS 5.52 5.15 4.76 6.29 8.24 9.78 11.71 13.84 15.82 18.05 20.58

Dividends paid 194 194 194 194 194 194 194 194 194 194 194 Dividend payout ratio 36.2% 38.8% 42.0% 31.8% 24.3% 20.4% 17.1% 14.5% 12.6% 11.1% 9.7%

Return analysis:RoE 27.9% 22.6% 18.7% 21.7% 24.0% 23.7% 23.4% 22.8% 21.5% 20.4% 19.4%RoIC 17.3% 12.0% 11.8% 12.9% 14.6% 15.7% 17.0% 17.2% 16.9% 16.5% 16.2%

Credit metrics:Cash 91 558 26 (0) (0) (0) (0) 499 1,176 1,989 2,954 Total debt 1,140 2,575 2,451 2,834 2,913 2,594 2,125 1,988 1,915 1,841 1,767 Shareholder's equity 2,071 2,338 2,605 3,021 3,625 4,380 5,321 6,468 7,808 9,364 11,164 Total capitalization 3,210 4,913 5,056 5,855 6,538 6,973 7,445 8,456 9,723 11,205 12,932

Total debt / Total cap. 35.5% 52.4% 48.5% 48.4% 44.5% 37.2% 28.5% 23.5% 19.7% 16.4% 13.7%Total debt / EBITDA 1.0x 2.3x 2.0x 1.9x 1.5x 1.2x 0.9x 0.7x 0.6x 0.5x 0.4x Net debt / EBITDA 1.0x 1.8x 2.0x 1.9x 1.5x 1.2x 0.9x 0.5x 0.2x (0.0x) (0.3x)

EBITDA / Interest expense 16.6x 7.7x 6.1x 7.2x 8.4x 10.0x 13.3x 17.5x 20.8x 24.4x 28.7x

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NRB Bearings – Valuation summary

52.34

71.70

74.93

40.24

51.85

72.77

84.18

90.54

54.53

70.71

DCF valuation

EV / EBITDA 2012E

EV / EBITDA 2013E

P / E 2012E

P / E 2013E

Valuation range

Current share price: INR 37.80

1. P / E 2013E valuation based on range of +/- 1.5x the average multiple of 9.7x for the peer group.2. P / E 2012E valuation based on range of +/- 1.5x the average multiple of 10.0x for the peer group.3. EV / EBITDA 2013E valuation based on range of +/- 0.5x the average multiple of 6.6x for the peer group.4. EV / EBITDA 2012E valuation based on range of +/- 1.5x the average multiple of 7.9x for the peer group.5. DCF valuation low price based on WACC of 12.0% and terminal growth rate of 3.0%; high price based on industrial growth rate of 8.0% and

terminal growth rate of 5.0%.

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NRB Bearings – DCF valuation

Terminal growth67.62INR 3.0% 3.5% 4.0% 4.5% 5.0%5.0% 55.65 59.10 62.99 67.43 72.52 6.5% 55.74 59.20 63.11 67.56 72.67 8.0% 55.78 59.25 63.17 67.64 72.77 9.5% 55.78 59.26 63.19 67.66 72.80

11.0% 55.72 59.21 63.14 67.62 72.77 Indu

tria

l gro

wth

Terminal growth67.62INR 3.0% 3.5% 4.0% 4.5% 5.0%11.0% 64.76 69.12 74.10 79.85 86.55 11.5% 58.17 61.87 66.08 70.88 76.42 12.0% 52.34 55.52 59.10 63.15 67.79 12.5% 47.15 49.90 52.97 56.42 60.34 13.0% 42.52 44.91 47.56 50.52 53.85

WAC

C

(in INR millions except per share data)

FYE 3/31 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Key driversTerminal growth rate: 4.5%Automotive growth rate: 11.0%Exports growth rate: 18.8%Industrial growth rate: 11.0%

WACC: 11.7%

EBIT 1,021 1,311 1,701 1,940 2,202 2,503 2,788 3,100 3,506 (-) Tax 309 396 514 587 666 757 843 937 1,060 NOPAT 712 915 1,187 1,354 1,536 1,746 1,945 2,163 2,446 (+) D&A 188 202 206 240 293 353 434 539 607 (-) Capex (750) (750) (572) (626) (686) (752) (848) (958) (1,083) (+) Changes in W.C. (278) (511) (654) (420) (476) (539) (620) (705) (802) FCF from operations (127) (145) 167 547 667 809 911 1,039 1,168 Discount factor 0.90 0.80 0.72 0.64 0.58 0.51 0.46 0.41 0.37

Discounted FCF (114) (116) 120 352 384 416 420 429 431

Total FCF 2,322 Terminal value 6,259 Total Enterprise value 8,580 (-) Total debt 2,575 (-) Minority interest 8 (+) Cash 558 Equity value 6,554 # of share outstanding 96.923 Equity val. / share 67.62INR % upside to current 78.9%

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NRB Bearings – Comparable company analysis

(in INR millions, except per share data)

Share Price % of Equity Enterprise EV / Sales EV / EBITDA EV / EBIT P / E P / BCompany name 20-Aug-12 52-w high Value Value 2011A 2012E 2013E 2011A 2012E 2013E 2011A 2012E 2013E 2011A 2012E 2013E

NRB Bearings Ltd. 37.80 74.1% 3,664 5,690 1.02x 0.93x 0.82x 5.0x 4.9x 4.2x 6.7x 6.5x 5.2x 7.2x 6.7x 5.2x 1.6x SKF India 617.00 84.8% 32,536 29,893 1.24x 1.19x 1.06x 10.1x 9.4x 8.2x 11.6x 10.8x 9.3x 15.6x 14.5x 12.6x 2.9x FAG Bearings India 1,613.50 90.0% 26,812 24,966 1.92x 1.68x 1.44x 10.2x 9.4x 7.6x 11.2x 10.5x 8.4x 15.2x 14.1x 11.4x 3.3x ABC Bearings 87.00 75.7% 1,005 1,500 0.85x 0.73x n.m. 5.1x n.m. n.m. 6.6x n.m. n.m. 6.5x 4.5x n.m. 0.8x

Mean 1.26x 1.13x 1.11x 7.6x 7.9x 6.6x 9.0x 9.3x 7.6x 11.1x 10.0x 9.7x 2.2x Median 1.13x 1.06x 1.06x 7.6x 9.4x 7.6x 9.0x 10.5x 8.4x 11.2x 10.4x 11.4x 2.2x High 1.92x 1.68x 1.44x 10.2x 9.4x 8.2x 11.6x 10.8x 9.3x 15.6x 14.5x 12.6x 3.3x Low 0.85x 0.73x 0.82x 5.0x 4.9x 4.2x 6.6x 6.5x 5.2x 6.5x 4.5x 5.2x 0.8x

Multiples (based on financials from model)NRB Bearings Ltd. 37.80 74.1% 3,664 5,690 1.02x 0.86x 0.70x 5.0x 4.7x 3.8x 6.7x 6.6x 5.3x 7.2x 7.8x 5.9x 1.6x

Note: Estimates for NRB, SKF and FAG from Batlivala and Karami research; estimates from Bloomberg for ABC Bearings.

Estimates on standalone basis for NRB.

For NRB and ABC, 2012E and 2013E indicates multiples for FYE March 31, 2013 and March 31, 2014, respectively; Multiples for calendar year for SKF and FAG.

Sales growth EBITDA margin EBIT margin Net income margin ROECompany name 2011A 2012E 2013E 2011A 2012E 2013E 2011A 2012E 2013E 2011A 2012E 2013E 2011A 2012E 2013E

NRB Bearings Ltd. 16.8% 9.2% 13.0% 20.3% 19.0% 19.8% 15.1% 14.4% 15.7% 9.1% 9.0% 10.1% 21.8% 19.7% 21.4%SKF India 16.8% 3.5% 12.4% 12.3% 12.7% 13.0% 10.7% 11.0% 11.5% 8.6% 9.0% 9.2% 20.6% 18.9% 18.5%FAG Bearings India 24.9% 14.3% 16.6% 18.9% 17.8% 19.0% 17.1% 15.9% 17.2% 13.5% 12.8% 13.6% 24.1% 20.9% 20.9%ABC Bearings (13.0%) 16.4% n.a. 16.5% n.a. n.a. 12.9% n.a. n.a. 8.7% 10.8% n.a. 12.8% n.m. n.m.

Mean 11.4% 10.9% 14.0% 17.0% 16.5% 17.3% 13.9% 13.8% 14.8% 10.0% 10.4% 11.0% 19.8% 19.8% 20.3%Median 16.8% 11.7% 13.0% 17.7% 17.8% 19.0% 14.0% 14.4% 15.7% 8.9% 9.9% 10.1% 21.2% 19.7% 20.9%High 24.9% 16.4% 16.6% 20.3% 19.0% 19.8% 17.1% 15.9% 17.2% 13.5% 12.8% 13.6% 24.1% 20.9% 21.4%Low (13.0%) 3.5% 12.4% 12.3% 12.7% 13.0% 10.7% 11.0% 11.5% 8.6% 9.0% 9.2% 12.8% 18.9% 18.5%

Operational performance (based on financials from model)NRB Bearings Ltd. 16.8% 18.0% 23.1% 20.3% 18.3% 18.6% 15.1% 13.0% 13.3% 9.1% 7.1% 7.6% 17.7% 20.2% 22.0%

Note: For NRB and ABC, 2012E and 2013E indicates multiples for FYE March 31, 2013 and March 31, 2014, respectively; Multiples for calendar year for SKF and FAG.