Timken India report :: HDFC Securities

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Quality play
We hosted the management of Timken India for a
series of investor meetings. Timken India is a high
quality franchise with potential to deliver strong
earnings growth and significantly expand return
ratios on the back of its asset light business model.
With over 200% returns in the past 12 months,
valuations appear heady at 52.3x on LTM earnings.
Nevertheless, with strong earnings momentum and
latent opportunities to enter into new product
segments, premium valuations seem justified.
Below are the key takeaways from our interaction
 Industry overview: The size of the bearings industry
in India is pegged at USD 1.5bn. Of the total, mobile
industries (Rail, CVs, Off-highway, aftermarket)
account for 65%, while process industries account for
the balance 35% (heavy industries, gear drives etc).
 Company structure: Timken India has a single
manufacturing facility at Jamshedpur, from which it
churns out tapered roller bearings for mobile
industries. The parent entity has a 100% subsidiary
which manufactures bearings suitable for process
industries from its plant in Chennai.
 Diversified revenue stream: Timken derives 25% of
its revenues from Railways, 25-30% from exports,
25% from industrial and aftermarkets and balance
from CVs, UVs and tractors. Further, ~25% of sales
are from traded goods, which essentially comprise of
imports of larger sized tapered, spherical and
cylindrical roller bearings from its group companies.
 Healthy growth prospects: Timken has set a revenue
target of Rs 12bn for FY17 from Rs 7.2bn in FY14.
While the past couple of years have seen healthy
growth in exports, the next leg of growth would be
largely driven by domestic demand. Management
expects Railways, CVs and aftermarkets to act as key
growth engines.
 Large opportunity in railways over the long term:
Timken India is a market leader for supply of tapered
roller bearings for freight trains (and select passenger
trains). Rail related revenue stream has been steady
in the USD 25mn/year range for the past few years. In
the near term, the company believes there is scope
to increase revenue run-rate to ~USD30mn/year.
Larger opportunities in this segment would flow
through once railway infrastructure upgradation is
completed, subsequent to which new wagon ordering
would gain momentum.
 Margin outlook: Timken’s operating margin profile
weakened considerably in the past few years as a
result of the rupee depreciation impact on imports
and increase in proportion of low margin traded
goods in overall sales. In the recent past, Timken has
localised a considerable portion of its steel
requirement, benefits of which are already reflecting
in the company’s gross margins in 1HFY15. On an
overall basis, company is guiding for margins to
remain in a wide range of 12% to 17%.
 Capex plans: Timken India plans to invest USD 6-8mn
per year towards capex at its existing facilities and for
augmenting its service network. Green-field
expansion would be considered only once a sharp
recovery is seen in domestic demand.

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3010440