Timken India CMP Rs. 564 Target Rs. 666 Rating BUY Stock Performance (%) 1m 3m 12m Timken -1% 1% 36% Sensex -8% -3% -4% BSE Auto -11% -3% -3% Financial Summary Year Revenues (Rs. mn) EBITDA (Rs. mn) EBITDA Margin Adj. PAT (Rs. mn) Adj. EPS (Rs.) P/E(x) EV/EBITDA(x) FY15 9,349 1,396 14.9% 807 11.9 47.5 27.3 FY16E 11,231 1,781 15.9% 1,077 15.8 35.6 21.5 FY17E 14,121 2,380 16.9% 1,508 22.2 25.4 16.0 Date Sep 16, 2015 Market Data SENSEX 25706 Nifty 7829 Bloomberg TMKN IN Shares o/s 68mn Market Cap Rs. 39bn 52-wk High-Low Rs. 669-372 3m Avg. Daily Vol Rs. 27mn Index member BSEMDCAP Latest shareholding (%) Promoters 75.0 Institutions 10.9 Public 14.1 Initiating Coverage Timken India (Timken) is the market leader for tapered roller bearings (TRB) in India. Being the subsidiary of The Timken Company, USA, which pioneered TRBs, Timken has access to the best technology and solutions. We see strong revenue visibility given high market shares in railways and commercial vehicles. With more than 1/3 of revenues from exports to parent, we see this as a long term growth opportunity as the parent leverages on low cost / high skilled engineering in India. Initiate coverage with a Buy; TP of Rs. 666 based on 30x FY17 EPS. Strong visibility in the rail segment (~20% of sales): Timken India has ~60% market share in the key sub-segments – rail freight wagons, high speed passenger coaches, metro rail and locomotives. It is a technology partner with Indian Railways (IR) for bearings required on the DFC wagons. Given higher axle load and average speed, expect opportunity from both value per wagon and volume of new wagons to be significant. Timken is also the only domestic manufacturer of bearings for high speed passenger wagons (eg: Shatabdi) and is a beneficiary of metro projects being implemented across India. While growth from DFC could be back ended, expect metro projects and opportunity for refurbishment/service of existing wagon fleet to be a near term driver. Expect segment growth of 25% CAGR from FY15-FY17 Steep recovery in CVs (~20% of sales): Steep pick-up in CV volumes bodes well for Timken as it is a leading supplier of axle bearings to the industry. Moreover, we see a significant opportunity for improvement in content per vehicle with the improvement in mix towards multi-axle vehicles (> 25MT accounts for 42% of volumes now vs. 27% in FY11). Timken is a 100% supplier to Ashok Leyland (through Automotive Axles) and ~40% supplier to VECV. The company supplies pinion bearings for few platforms to Tata Motors. Apart from CVs, the company supplies bearings to tractors (~45% share with M&M, Escorts, John Deere, New Holland). Expect this segment to record a 27% CAGR from FY15-FY17 on the back of continued recovery in the CV segment and the expected positive growth from tractors in FY17. Exports and services: Exports have grown at a 29% CAGR in the last four years, and we expect growth to remain strong at 20%+ in the next two years. We see the parent leveraging on Timken India’s strong engineering capabilities coupled with low cost manufacturing. Services (~3% of sales) business coupled with non-bearing products such as gears, is expected to be a long term driver in-line with parent’s goal to be a solutions provider for mechanical power transmission. The company has a plant at Raipur solely for gear-box repair, this indicates the management’s focus on this market. Financials and margins: Traded bearings (imported from parent) have recorded a CAGR of >40% over last four years, helping the company achieve overall growth. FY15 also saw traded gross margin grow significantly to 27% vs. 15% in FY14. We expect margins to remain at current levels and hence result in a PAT CAGR of ~37%. We expect Timken’s growth to be significantly higher than its peers even as it has the best parameters in terms of return ratios. Leading bearing manufacturer with exposures to the right end-markets MUKESH SARAF [email protected]+91 44 4344 0041 RAMAKRISHNAN SESHAN [email protected]+91 44 4344 0020 Find Spark Research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset Page 1
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Timken India CMP
Rs. 564
Target
Rs. 666
Rating
BUY
Stock Performance (%)
1m 3m 12m
Timken -1% 1% 36%
Sensex -8% -3% -4%
BSE Auto -11% -3% -3%
Financial Summary
Year Revenues (Rs. mn) EBITDA (Rs. mn) EBITDA Margin Adj. PAT (Rs. mn) Adj. EPS (Rs.) P/E(x) EV/EBITDA(x)
FY15 9,349 1,396 14.9% 807 11.9 47.5 27.3
FY16E 11,231 1,781 15.9% 1,077 15.8 35.6 21.5
FY17E 14,121 2,380 16.9% 1,508 22.2 25.4 16.0
Date Sep 16, 2015
Market Data
SENSEX 25706
Nifty 7829
Bloomberg TMKN IN
Shares o/s 68mn
Market Cap Rs. 39bn
52-wk High-Low Rs. 669-372
3m Avg. Daily Vol Rs. 27mn
Index member BSEMDCAP
Latest shareholding (%)
Promoters 75.0
Institutions 10.9
Public 14.1
Initiating Coverage Timken India (Timken) is the market leader for tapered roller bearings (TRB) in India. Being the subsidiary of The
Timken Company, USA, which pioneered TRBs, Timken has access to the best technology and solutions. We see
strong revenue visibility given high market shares in railways and commercial vehicles. With more than 1/3 of
revenues from exports to parent, we see this as a long term growth opportunity as the parent leverages on low
cost / high skilled engineering in India. Initiate coverage with a Buy; TP of Rs. 666 based on 30x FY17 EPS.
Strong visibility in the rail segment (~20% of sales): Timken India has ~60% market share in the key sub-segments –
rail freight wagons, high speed passenger coaches, metro rail and locomotives. It is a technology partner with Indian
Railways (IR) for bearings required on the DFC wagons. Given higher axle load and average speed, expect opportunity
from both value per wagon and volume of new wagons to be significant. Timken is also the only domestic manufacturer of
bearings for high speed passenger wagons (eg: Shatabdi) and is a beneficiary of metro projects being implemented across
India. While growth from DFC could be back ended, expect metro projects and opportunity for refurbishment/service of
existing wagon fleet to be a near term driver. Expect segment growth of 25% CAGR from FY15-FY17
Steep recovery in CVs (~20% of sales): Steep pick-up in CV volumes bodes well for Timken as it is a leading supplier of
axle bearings to the industry. Moreover, we see a significant opportunity for improvement in content per vehicle with the
improvement in mix towards multi-axle vehicles (> 25MT accounts for 42% of volumes now vs. 27% in FY11). Timken is a
100% supplier to Ashok Leyland (through Automotive Axles) and ~40% supplier to VECV. The company supplies pinion
bearings for few platforms to Tata Motors. Apart from CVs, the company supplies bearings to tractors (~45% share with
M&M, Escorts, John Deere, New Holland). Expect this segment to record a 27% CAGR from FY15-FY17 on the back of
continued recovery in the CV segment and the expected positive growth from tractors in FY17.
Exports and services: Exports have grown at a 29% CAGR in the last four years, and we expect growth to remain strong
at 20%+ in the next two years. We see the parent leveraging on Timken India’s strong engineering capabilities coupled with
low cost manufacturing. Services (~3% of sales) business coupled with non-bearing products such as gears, is expected to
be a long term driver in-line with parent’s goal to be a solutions provider for mechanical power transmission. The company
has a plant at Raipur solely for gear-box repair, this indicates the management’s focus on this market.
Financials and margins: Traded bearings (imported from parent) have recorded a CAGR of >40% over last four years,
helping the company achieve overall growth. FY15 also saw traded gross margin grow significantly to 27% vs. 15% in
FY14. We expect margins to remain at current levels and hence result in a PAT CAGR of ~37%. We expect Timken’s
growth to be significantly higher than its peers even as it has the best parameters in terms of return ratios.
Leading bearing manufacturer with exposures to the right end-markets
Service revenue has been flat over the last four years
Source: Company, Spark Capital; FY12 (15 month year) as year ending change to March
Key activities under service/repairs business
Source: Company, Spark Capital
Bearing Repair and Remanufacturing
Gear-box repair and
onsite services
Electric motor & generator
repair and controls
Page 11
Service business for Timken India includes 1) repair services for rail and
industrial bearings, housings and gear boxes 2) Reliability services and
bearings inspection 3) ‘MILLITEC’ services under which the company
provides on-site maintenance and service for steel / aluminium mills
Management have significant focus on this business and have also set
up a plant in Raipur specifically for gear-box repair. The technology is
from the parent’s acquisition of ‘Philadelphia-Gear’ in 2011
The parent is looking to position itself across the world as a solution
provider for mechanical power transmissions, rather than a bearings
manufacturer.
Key competitors in gears segment: Shanthi Gears and Elecon engg
Source: Company, Spark Capital
0
50
100
150
200
250
300
350
400
FY06 FY07 FY08 FY09 FY10 FY12 FY13 FY14 FY15
Key drivers: #4 Improving service / repair capability by way of parents support
-5%
5%
15%
25%
35%
45%
FY11 FY12 FY13 FY14 FY15
Shanthi Gears - EBITDA% Elecon Engg. - EBITDA%
The segment although currently small for Timken India, is a high margin business. We
expect significant growth, in-line with pick-up in manufacturing, infra and mining activities.
Other key players in the segment are Siemens-Flender, Premium transmission and New
Allenberry works
Timken India CMP
Rs. 564
Target
Rs. 666
Rating
BUY
Page 12
Key drivers: #4 Improving service/repair capability by way of parents support
Timken India CMP
Rs. 564
Target
Rs. 666
Rating
BUY
The Timken Company, USA (parent) – focus on non-bearing
products/ services
Source: Company, Spark Capital
Parent has diversified end-markets, dominated by process industries
Source: Company, Spark Capital
Most of the acquisitions in the last five years have been in the repair/gear box services space as Timken is looking to expand its portfolio
Page 13
Parent company’s is expanding its capabilities by way of strategic acquisitions
84%
61%
11%
21%
5% 18%
0%
20%
40%
60%
80%
100%
2001 Current
Tapered Roller Bearing Other Bearing Non-bearing Products/Services
About 50% of this is
power transmission
products and
remaining is services
19%
15%
11%
8%
7%
7%
6%
5%
5%
5%
4%
4%
3%
0% 5% 10% 15% 20%
Industrial Machinery
Automotive
Rail
Heavy Truck
Energy
Defense
Agriculture
Industrial Services
Metals
Mining
Civil Aerospace
Construction
Others
Timken India CMP
Rs. 564
Target
Rs. 666
Rating
BUY
Examples of how Timken has position itself to take advantage of the
aftermarket and service business
Source: Company, Spark Capital
Timken India is also expanding its portfolio to ‘Adjacent products & services’
in line with parent’s goal
Page 14
Timken India also offers ‘adjacent products’ related to mechanical power transmission like coupling, housed units, high performance grease, and
lubrication systems. The company calls this as the ‘Beyond Bearing Portfolio’
The gear-repair unit at Raipur with the capability of Philadelphia Gear focuses on industrial gear box repair, journal rebuilding and chock repairs. The
Raipur unit is currently serving customers ranging from Steel, Power, Cement and general industries.
The plant executed orders with offering of inspection, repair and upgrade of gearbox weighing from 2 -16 tons for wide range of domestic customers and
have also exported few gearboxes for cooling tower application to USA.
The company targets to expand services for gearbox parts and new enclosed gearboxes for domestic markets, also continue to look for opportunities for
exports back to USA.
Onsite MILLTEC program provides around-the-clock management of a steel mill's roll shop to minimize operational problems and downtime.
MILLTEC continues serve at customer sites and added a new site in Eastern India (in FY15) making total of 11 sites across India.
Timken India is extremely positive on the outlook for onsite services is as it plans to add more services for its existing and new sites
Parent company is targeting a broader market than just bearings
Source: Company, Spark Capital
Adjacent Products & Services
Chains, belts, gear drives, couplings, brakes,
sprockets, clutches, lubrication, condition
monitoring, rebuild and repair services
Bearings
Spherical, Cylindrical, housed unit and ball
bearings
Tapered Roller Bearings
Rail refurbishment and service is a large opportunity for the parent. There is a large
installed base of wagons
Expected Life of a Wagon 35 Years
Typical Lifecycle for bearings and related components 5 Years
Lifetime revenue opportunity for a 100 car train ~$0.8mn
High service requirements for rolling mills is a huge opportunity that Timken addresses
by way of its 'MILLTEC' program
Level of criticality of rolling mill for a steel plant Extremely high
Failure in equipment can lead to the shut-down of rolling mill
Potential impact to the plant $18-50 per hour
Timken India CMP
Rs. 564
Target
Rs. 666
Rating
BUY
Page 15
Peer comparison: Timken has superior ratios aided by better mix, exports & lower RM imports
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Absolute
Rating
Interpretation
BUY Stock expected to provide positive returns of >15% over a 1-year horizon REDUCE Stock expected to provide returns of <5% – -10% over a 1-year
horizon
ADD Stock expected to provide positive returns of >5% – <15% over a 1-year
horizon SELL Stock expected to fall >10% over a 1-year horizon
Page 18
Timken India CMP
Rs. 564
Target
Rs. 666
Rating
BUY Disclaimer (Cont’d)
Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency,
Spark Capital has incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report:
Disclosure of interest statement Yes/No
Analyst financial interest in the company No
Group/directors ownership of the subject company covered No
Investment banking relationship with the company covered No
Spark Capital’s ownership/any other financial interest in the company covered No
Associates of Spark Capital’s ownership more than 1% in the company covered No
Any other material conflict of interest at the time of publishing the research report No
Receipt of compensation by Spark Capital or its Associate Companies from the subject company covered for in the last twelve months:
Managing/co-managing public offering of securities
Whether Research Analyst has served as an officer, director or employee of the subject company covered No
Whether the Research Analyst or Research Entity has been engaged in market making activity of the Subject Company; No
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