NRB Bearings: A Smallcap Stock Poised for Growth in the Evolving Mobility Sector

The journey towards full electrification in the automotive world has not been as seamless as originally anticipated, particularly in the passenger vehicle sector. Challenges such as reduced subsidies and inadequate charging infrastructure have slowed the progress, creating a classic "chicken and egg" scenario. While electric vehicles (EVs) struggle with the shift from internal combustion engine (ICE) vehicles, hybrid vehicles are rapidly gaining traction.

In light of these challenges, it may be prudent for investors to focus on companies that are not solely dependent on the success of EVs, but those positioned to thrive in a broader range of mobility trends. One such company that stands out in this evolving market is NRB Bearings, a leader in the bearings industry with a diversified and resilient business model.

NRB Bearings: Key Facts and Market Position

NRB Bearings is a significant player in the bearings industry, providing precision friction solutions across a wide range of sectors. It supplies essential components like ball bearings, roller bearings, planetary shafts, crank pins, and kingpins. With a strong market presence in the automotive, railway, defense, and aerospace sectors, NRB Bearings offers solutions that cater to multiple mobility applications.

The company was the first in India to introduce needle roller bearings, establishing its reputation as an industry pioneer. NRB Bearings also stands out due to its robust research and development (R&D) capabilities, enabling it to continuously innovate and offer over 3,000 customized product designs tailored to its clients' needs.

NRB’s dominance is evident in its market share, commanding approximately 60% of the needle roller bearings market in India. Additionally, more than 90% of vehicles on Indian roads are fitted with NRB’s products, illustrating its deep market penetration. Notably, NRB is an exclusive supplier of bearings to Ola’s two-wheeler factory, further solidifying its role in the rapidly growing EV two-wheeler market.

Diversified and De-Risked Business Model

One of the most appealing aspects of NRB Bearings is its diversified business model. While the company is deeply involved in the automotive sector, it strategically serves all segments, including commercial vehicles, two and three wheelers, and passenger cars. Additionally, NRB caters to industries such as agriculture, construction equipment, and even the defense sector, both in India and globally.

NRB Bearings generates 60-65% of its revenue from original equipment manufacturers (OEMs) and tier 1 clients, which ensures a stable revenue stream. The remaining revenue comes from exports (25%) and the aftermarket (10-12%), allowing NRB to tap into international markets and diversify its income sources. The company’s exports primarily serve hybrid and electric drive passenger cars and trucks, as well as electric powertrain vehicles in Europe, the U.S., Japan, and South Korea.

Additionally, NRB has effectively minimized its customer concentration risk, with no single client contributing more than 6-7% of its total revenue. This broad customer base, combined with its strong international presence, positions the company to withstand market fluctuations.

A Focus on Innovation and Future Growth Opportunities

One of NRB Bearings' standout qualities is its commitment to innovation through its strong R&D division. The company’s extensive product portfolio includes designs that are not only tailored to current market needs but are also future-proof, particularly as the world moves towards electric and hybrid vehicles.

Recently, NRB expanded its offerings to include EV hybrid and EV agnostic products, which has attracted the attention of international OEMs interested in sourcing advanced bearings for hybrid and electric vehicles. This strategic expansion enables NRB to tap into the growing demand for EV components without being entirely reliant on the uncertain growth of the EV sector in India.

Benefiting from Structural Industry Tailwinds

In addition to its strong market presence and innovative product range, NRB Bearings stands to benefit from several structural tailwinds that could further propel its growth. These include:

1. China Plus One Strategy: As global companies look to diversify their supply chains away from China, NRB Bearings is well positioned to capture new business opportunities.

2. PLI (Production Linked Incentive) Scheme: The Indian government’s PLI scheme is designed to boost domestic manufacturing, which could help NRB expand its production capabilities.

3. Localization Norms: With an increased focus on local sourcing of components, NRB Bearings could benefit from being a trusted and established local supplier.

4. Vehicle Scrappage Policy: India’s vehicle scrappage policy, aimed at removing old and unfit vehicles from the roads, is likely to increase demand for new vehicles, and by extension, NRB’s bearings.

Financial Performance and Stock Performance

NRB Bearings has demonstrated solid financial performance. The company’s return ratios stand at 15%, with an EBITDA margin of 17.4% for FY24. It has a manageable deb to equity ratio of 0.2, indicating a strong balance sheet. Additionally, the company has been consistent with shareholder returns, offering a dividend payout of over 20% in FY24.

The stock has also performed well, trading at a price to earnings (PE) ratio of 31 times, which is reasonable given its growth potential. Promoter stake in the company has increased from 49.1% in September 2020 to 50.69% in June 2024, further reflecting confidence in the company’s future. Notably, insiders have been accumulating shares, with significant buying up to Rs 320 per share as recently as September 2024.

Risks to Consider

Despite NRB Bearings' strong market position, there are a few risks that investors should be aware of:

1. Auto Sector Slowdown: A slowdown in the auto industry could impact the company’s revenues, particularly as a significant portion of its business comes from the automotive sector.

2. Raw Material Price Fluctuations: NRB Bearings relies heavily on steel, and fluctuations in steel prices could affect its margins.

3. Working Capital Intensity: The business is capital intensive, which could affect its liquidity in times of market stress.

In conclusion, NRB Bearings is a small-cap stock that presents a compelling investment case, particularly for those looking for exposure to the evolving mobility landscape. The company’s diversified business model, market leadership, innovation in product offerings, and strong financials make it a resilient player in an industry undergoing significant shifts. With its solid international presence and ability to adapt to emerging trends like hybrid and electric vehicles, NRB Bearings is well-positioned for future growth.

While it’s important to consider the risks associated with the auto sector and raw material prices, the company's strong fundamentals, insider buying activity, and growth potential make it a stock worth adding to your small cap watchlist. However, investors should conduct their own research or consult financial advisors before making any investment decisions.