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
Timken India CMP
Rs. 564
Target
Rs. 666
Rating
BUY
Corporate Factsheet
Promoter
Background
Timken India is a subsidiary of Timken Singapore Pte which is a subsidiary of The Timken Company, USA. The Timken Company
is the flagship company of the Timken Group. Founded over 100 years ago by Mr. Henry Timken, who received two patents on the
design of a tapered roller bearing. The Timken Company is a leader in the bearings industry which applies its deep knowledge of
materials, friction management and mechanical power transmission to improve the reliability and efficiency of industrial machinery
and equipment all around the world. It manufactures and manages global supply chains for multiple product lines including anti-
friction bearings, mechanical power transmission solutions, engineered steel and related precision steel components
Business
Timken India is a leader for taper roller bearing supplies in India and supply to India Railways, commercial vehicles and off-
highway applications on the mobile industries. The company is also large supplier in process industries comprising of metals,
mining, cement, power generation, wind, oil & gas, pulp & paper and food & beverage
Management
Mr. Sanjay Koul: Chairman & Managing Director. He has 28 years of experience and has been with Timken for 25 years. He was
previously national sales manager for Timken’s railway business, Plant Manager at Jamshedpur plant, general manager of Asia’s
supply chain and director of manufacturing and supply chain for Timken’s business in Asia
Mr. Amit Kumar Das: General Manager, Organisational Advancement. Prior to joining Timken in 2012, he worked at Asian Paints
Limited, Allergan Singapore Pte. Limited and Atul Limited.
Mr. R. Ramesh: Business Controller (India). Prior to joining in 2011, he worked at ABB Global Industries and Services Limited,
Alstom Power India Limited and Reliance Infocomm Limited
Presence Bearing manufacturing plant in Jamshedpur; Industrial gear-box repair plant at Raipur
Corporate Structure
75% owned by Timken Singapore Pte. Timken Engineering and Research India Pvt. Ltd. (TERI), located in Bangalore, is a fully
owned subsidiary of Timken Singapore Pte Limited. TERI caters primarily to The Timken Company with product technology,
manufacturing technology and information technology related work
Revenue Model ~20-25% each from Railways, CV/Tractors, Aftermarket (auto and industrial) and Exports accounts for ~35%
Key Success
Factors
1) Timken India is part for the Timken Group which is the global technology leader for tapered roller bearing. Timken India has
~60% market share with most railway and commercial vehicle applications. 2) Caters to new product lines by way of imports from
the parent and focuses on localising products with high volume potential 3) Looking to transform into a solution provider for
mechanical power transmissions 3) Significant export opportunity given the strong engineering capabilities in India as significantly
low manufacturing costs
Credit Rating ICRA Short Term: A1+
Auditors M/s S.R. Batliboi & Co., LLP
Page 2
Timken India CMP
Rs. 564
Target
Rs. 666
Rating
BUY
Products Products
Bearings Industry in India
Indian Bearings Industry (Rs. 95bn in FY12, down to Rs. 85bn in FY15)
Source: Industry, Spark Capital Research * industry break-up as per FY12
Tapered42%
Cylindrical29%
Spherical17%
Needle9%
Thrust4%
Roller Bearing52%
Ball Bearing48%
After Market35%
OEM65%
Imports38%
Organised46%
Unorganised16%
Indigenous and Imported composition
Source: Industry, Spark Capital Research
Indegenous62%
Imported38%
Unorganised bearings primarily represent small scale manufacturers and suppliers of spurious
bearings. These generally have strong regional presence and cater to the replacement markets for
both industrial and automotive segments
Imported bearings account for ~40% of total Indian bearings industry. Imported bearings are primarily
used in the industrial markets, whereas automobile markets are catered to by manufactured bearings
Industrial segment typically requires customisation, large sized bearings and maintaining large number
of SKUs. Volumes for a particular type of bearings wouldn’t be large (as in the case of automobiles),
while portfolio of products would be large. Hence the major players in this segment prefer to cater to
the demand via imports
Most bearing manufacturers in India are MNCs having technology backing from the parent company or
have technology that has been acquired from MNCs.
Each of the manufacturers have specialised in certain bearing types and maintain market shares in the
respective segments
Electrical equipment
5%
Heavy Industries
20%
General Engineering
27%
Automotive48%
Page 3
Timken India CMP
Rs. 564
Target
Rs. 666
Rating
BUY
Types of roller bearings, applications and major players
Type of
bearing Application Major players
Major Market
Share
Tapered
roller
bearings
Vehicle front wheels, differential &
pinion configurations, conveyor rolls,
machine tool spindles, trailer wheels
SKF India, FAG
Bearings Limited,
NEI, Timken India,
ABC Bearings
TIMKEN: 45%
Cylindrical
roller
bearings
Cement and coal pulverizers, pumps,
compressors, gear boxes, centrifuges,
mining equipment, transmissions
NEI, SKF India, FAG
Bearings, NRB
Bearings
FAG: 45%
Spherical
roller
bearings
Gearboxes, casters, aggregates, heavy
stationary, industrial conveyor systems,
industrial fans
SKF India, FAG
Bearings, NEI FAG: 45%
Needle
roller
bearings
Transmissions, transfer cases, engines
and valve trains, steering and braking
systems, axle supports, outboard
engines, power tools, copiers
INA Bearings, SKF
India, NRB Bearings NRB: 70%
Thrust roller
bearings
Classifiers, extruders, oil well swivels,
pumps, pulp refiners, machine tools
SKF India, FAG
Bearings, Timken
India
-
Ball
Bearings
Wide applications in 2W, 3W and four
wheelers. Used primarily in wheels and
axles
SKF India, FAG
Bearings, Timken
India, ABC Bearings,
NEI
SKF 65%
Source: Industry, Spark Capital Research
Each of the top companies have a niche and technology is from MNC parent/collaboration
Market share of top 5 players
Source: Spark Capital Research
SKF30%
FAG18%
NEI (NBC)13%
NRB8%
Timken8%
Most manufacturers have a technical collaboration with MNCs
Company Technology Relationship Specialisation
SKF India SKF, Sweden Subsidiary Ball bearings
FAG India FAG, Germany Subsidiary Cylindrical & Spherical
roller bearings
Timken India Timken, USA Subsidiary Taper roller bearings
NRB Bearings Nadella (France) and
INA (Germany) Acquisition Needle roller bearings
ABC Bearing NSK Japan JV / Technical
Collaboration Ball bearings
NEI Bearings NTN Japan Technical
Collaboration
Ball and Taper roller
bearings
Koyo India JTEKT Corp, Japan Subsidiary Single ball bearing,
Taper roller bearings
Bimetal
Bearings Clevite Inc, USA
Technical
Collaboration Engine bearings
Source: Industry, Spark Capital Research
Page 4
Timken India CMP
Rs. 564
Target
Rs. 666
Rating
BUY Key segments include Railways, commercial vehicles and industrial/manufacturing
Page 5
FY15: Revenue Rs. 9.2bn
Service Revenue: 3%
Manufactured Bearings: 61%
(includes exports : ~35% of revenue and
aftermarket ~13% of revenue)
Traded Bearings: 36%
Tapered Roller bearings primarily for
Mobile Industries 60-65% of India’s bearing market
Primarily for Process
Industries 30-35% of Indian bearing market
Commercial Vehicle / Tractors
(20-25% of revenues)
Freight
Application
Passenger
Application Locomotives
Tapered Roller Bearings
used in most Freight
applications in India
Timken is ~60% market
share in India
DFC would be a big
opportunity given the rise in
number of wagons
Freight wagons have aged
and replacement of these
itself could be a big market
Partners with Indian
Railways to refurbish these
bearings
Not present in the regular
coaches currently as
spherical bearings are used,
although the technology is
getting phased out
~60% market share for new
aged high speed coaches
(Shatabdi / Rajdhani). Also
export these bearings
Metro applications is a near
term growth driver
Partners with Indian
Railways to refurbish/service
these bearings
Market leader for supply to
locomotives
Partners with Indian
Railways to refurbish these
bearings
Key industries served include Metals, Mining,
Cement, Power Generation, Wind, Oil & Gas,
gear-drives, pulp & paper and Food &
beverage
Key customers include BHEL, Tata Steel,
JSW, CMI and Esmech Equipment
These bearings are primarily traded bearings.
i.e. imported from the parent company
Key products include spherical, cylindrical,
large size tapered roller bearings, specialty
ball bearings
Depending on the end-market and applications
the bearings are imported from different
Timken plants. For example, Cement bearings
are imported from China, while for defense /
aeronautical applications the bearings are
imported from USA
‘MILLTEC’ Bearing Reconditioning & Repair
Condition Monitoring and Reliability Services
Plant for gear box repair in Raipur –
technology came in from the parent acquiring
Philadelphia Gears
Key segment to aid in achieving the
company’s target of transforming into a
solutions provider for mechanical power
transmissions
Shanthi Gears and Elecon Engineering are
the key competitors in the gear-box
repair/components segment. High margin
segment with strong growth drivers
Given the nature of the application which
involves carrying high tonnage, CV and Tractor
applications use more of tapered roller bearings
Majority of supplies is for heavy commercial
vehicles
Primary supplies are for Axles, Transmissions
and Wheel end
Supply to tier 1 auto component companies
such as Automotive Axles
Key customers include Ashok Leyland, New
Holland tractors, Escorts, Dana and Fiat
Railways
(20-25% of revenues)
Timken India CMP
Rs. 564
Target
Rs. 666
Rating
BUY Timken India has seen significant revenue growth from exports and trading business in FY15
Page 6
More than 1/3rd of the revenue is catered to by traded products
Source: Company, Spark Capital
Exports and traded segments have been the key revenue drivers
Source: Company, Spark Capital; * change in year ending to March from FY12
FY15 saw growth in both revenue and EBITDA margin
Source: Company, Spark Capital
High exposure to CV and Rail end-markets
Source: Company, Spark Capital
Manufactured, 61%
Traded, 36%
Service, 3%
57%
44% 30% 24%
25%
27%
33% 37%
14%
24% 33%
36%
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
FY12 (15 months) FY13 FY14 FY15
Manufactured - domestic Manufactured - exports Traded bearing Service
13.5% 15.2%
12.8%
10.7% 9.9%
14.9%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
FY09 FY10 FY12 (15 months)
FY13 FY14 FY15
Revenue EBITDA Margin %
CV, 20%
Rail, 20%
Aftermarket / Process
industries, 23%
Exports, 37%
Timken India CMP
Rs. 564
Target
Rs. 666
Rating
BUY Timken India key products and applications
Page 7
Market segment Product portfolio Application
Mobile Industries
Rail, Light Vehicle, Off highway, heavy trucks, auto aftermarket
Trucks and buses Taper roller bearings
Axles, transmissions, wheel end Lubricants
Freight and passenger rails
Taper roller bearings
Wagons, locomotives, coaches Housings
Seals
Lubricants
Off-highway equipments, agricultural tractors Taper roller bearings
Axles, transmissions, wheel end, engine Spherical roller bearings
Process Industries
Heavy industries, Industrial processes, Gear drives, Energy, Industrial distribution
Metals industries, mines, cement plants
Taper roller bearings
Casters, flat products, long products. Shovels, draglines,
Haul trucks, loaders material handling, crushing, screening,
vertical rolling mills
Spherical roller bearings
Cylindrical roller bearings
Lubricants
Seals
Condition monitoring equipments
Power generation plants, Taper roller bearings
Pulverizers, bowl mills, pumps material handling Spherical roller bearings
Gear drives
Taper roller bearings
Industrial & planetary gearboxes, geared motors, fans Spherical roller bearings
Cylindrical roller bearings
Pulp and paper industries, food and beverages
industries Taper roller bearings Chippers/ debarkers, forming/press, dryer, calendar
Oil & Gas Taper roller bearings Top drives, mud pumps, crown / traveling blocks, rotary
tables, compressors Spherical roller bearings
Wind Taper roller bearings
Main shaft, gear boxes Spherical roller bearings
Manufactured in India Imported from Timken Group Locally Sourced in India
Timken India CMP
Rs. 564
Target
Rs. 666
Rating
BUY
Upcoming metro projects
Source: Company, Spark Capital
City Status Project Cost
(Rs. bn)
Expected
completion
Delhi Phase 3 ~50% complete 353 -
Mumbai Phase 2 - 427 2021
Mumbai Phase 3 10% 231 -
Bangalore Phase 1 80%, 2 tracks operational 116 2015
Bangalore Phase 2 - 264 2020
Chennai Phase 1 60% complete 184 2015
Hyderabad 50% complete 141 2017
Kochi 30% complete 56 -
Jaipur 90% of phase 1 31 2018
Ahmedabad Approved by cabinet 107 2018
Nagpur Approved by cabinet 87 2018
Pune Approved by cabinet 118 -
Lucknow Approved by cabinet 69 -
Key drivers: #1 Railways to drive growth in multiple ways
Page 8
Overall railway bearing market is estimated to be ~Rs. 10bn, out of
which freight application accounts for ~60%. Timken is positioned
strongly with ~60% market share in the freight segment and similarly
with high speed passenger segment. We expect the market size to
significantly expand with DFC, replacement of existing wagons and the
metro rail projects in various cities
Timken India is a technology partner with Indian Railways (IR) for
selecting the kind of bearings that will be required for the wagons on the
DFC. Hence, Timken is working closely with RDSO and will be major
suppliers of bearings required for new wagons
Typically an existing wagon would require eight bearings from Timken at
an average cost of Rs. 6,500 per bearing. We expect the average cost
per bearing to significantly increase as the speed and load requirements
increase
DFC to significantly increase speed and axle load
Source: Company, Spark Capital
Feature Existing On DFC
Container
Stack Single Stack Double Stack
Train
Length
Train Load 4,000 Ton 15,000 Ton
Axle Load
Max Speed
700m 1500m
22.9 t/25 t 32.5t/25t for Track
Superstructure
75 KMPH – Single Stack 100 KMPH – Double Stack
IR has a wagon fleet of ~0.24mn, of which 0.14mn wagons are box-type
(coal transportation)
On an average the additional wagons required are ~15,000 per year –
while currently the procurement is lower due to inadequate ordering on
the back of financial crunch for the IR
With the DFC, industry estimates that the average number of wagons to
be procured would rise to ~75,000 wagons in the initial years. This would
be a significant positive for Timken India, given they are large suppliers
to wagon manufacturers
Apart from DFC, IR are planning to implement high speed passenger rail
corridors. This would again benefit Timken, given they are the sole
domestic manufacturers of Taper Roller Bearings for this application
Timken India CMP
Rs. 564
Target
Rs. 666
Rating
BUY
Outperformance is directly correlated to mix of HCVs (MAVs)
Source: Company, Spark Capital
Page 9
Expect strong growth in HCVs over the next two years
Source: Company, Spark Capital
Key drivers: #2 Commercial vehicle growing in volume and value (HCV product mix)
Domestic revenues have outperformed the CV industry volumes
Source: Company, Spark Capital
37%
46%
2%
-4%
20%
28%
20%
-2%
-20%
-3%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
CY10 FY12 FY13 FY14 FY15
Domestic Revenue YoY CV Industry YoY
Timken has a majority market share for the supply of TRBs in the HCV
segment. Approximate market share that Timken has with major OEMs
for axle bearings is as follows : Ashok Leyland ~100%, VECV ~40%.
M&M, Escorts, John Deere and New Holland ~45%. Also large supplier
to Tata Motors for Pinion bearings
The company’s domestic revenue (primarily auto and railways) has
significantly outperformed the CV industry. This is primarily on the back
of significant shift towards MAVs (multi-axle vehicles, > 25MT)
On an average Timken supplies four bearings per axle at an average
realisation of ~Rs. 6,000 per bearing. Increase in MAVs significantly
improve Timken’s average realisation per vehicle.
We expect steep growth in the CV segment to continue in FY16 and
FY17, moreover the growth would be lead by the HCV segment. This
would continue to benefit Timken India
19% 22% 20% 22% 26% 26% 19% 17%
29% 24% 22% 20% 22% 20%
17% 18%
43% 38%
31% 26% 25% 27%
25% 23%
9% 16%
27% 31% 28% 28% 39% 42%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY09 FY10 FY11 FY12 FY13 FY14 FY15 YTD FY16
7.5 - 12 MT 12-- 16 MT 16-- 25 MT > 25 MT
17%
-24% -22%
17% 21% 20% 12%
-30%
-20%
-10%
0%
10%
20%
30%
0
1,00,000
2,00,000
3,00,000
4,00,000
5,00,000
FY12 FY13 FY14 FY15 FY16E FY17E FY18E
MHCV Industry Volumes YoY %
Timken India CMP
Rs. 564
Target
Rs. 666
Rating
BUY Key drivers: #3 Timken India’s is low cost with high engineering capabilities to drive exports
Page 10
…consequently increasing the share of export revenue
Source: Company, Spark Capital
Increase in export revenue enabled by consistent investments in
capacity; fungible between domestic and export segments
Source: Company, Spark Capital
25% 26% 33% 37%
75% 74% 67% 63%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2012 2013 2014 2015
Export revenue% Domestic revenue%
Export revenue grown consistently even when domestic revenue was
sluggish…
Source: Company, Spark Capital
0%
5%
10%
15%
20%
25%
30%
0
100
200
300
400
500
600
700
800
CY09 CY10 FY12 FY13 FY14 FY15 FY16E
Capex Capex as % of Op. Gross block
Timken has consistently invested and is expected to continue to invest in
manufacturing capacities.
These capacities being fungible between products for the domestic and
export markets, in the event of a slow down in either market, the
capacities can be used to service the other market
Historically, during a slowdown in the domestic market, Timken has
been able to scale up revenue in the export markets, maintaining its
fixed asset turnover ratio at a healthy >2.5xover the 6 years through
FY15
37% 46%
2% -4%
20%
56%
36%
8%
32%
44%
-10%
0%
10%
20%
30%
40%
50%
60%
CY10 FY12 FY13 FY14 FY15
Domestic revenue growth % (yoy) Export revenue growth % (yoy)
Timken India CMP
Rs. 564
Target
Rs. 666
Rating
BUY
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
Manufactured Bearings gross margin FY12/CY11 FY13/CY12 FY14/CY13 FY15/CY14
NRB 55.1% 52.4% 51.1% 52.3%
SKF 51.9% 48.6% 51.6% 52.5%
FAG 49.9% 49.2% 47.6% 46.4%
TIMKEN 42.8% 41.5% 44.7% 44.1%
Traded Bearings gross margin FY12/CY11 FY13/CY12 FY14/CY13 FY15/CY14
SKF 15% 17% 15% 16%
FAG 24% 15% 12% 22%
TIMKEN 17% 18% 15% 27%
Traded as a % of total revenue FY12/CY11 FY13/CY12 FY14/CY13 FY15/CY14
SKF 47% 46% 44% 44%
FAG 34% 34% 32% 31%
TIMKEN 14% 24% 33% 36%
EBITDA Margin % FY12/CY11 FY13/CY12 FY14/CY13 FY15/CY14
NRB 19.6% 16.2% 16.9% 18.4%
SKF 12.3% 11.6% 11.5% 11.5%
FAG 19.6% 15.2% 12.8% 14.8%
TIMKEN 12.8% 10.7% 9.9% 14.9%
Fixed asset turnover FY12/CY11 FY13/CY12 FY14/CY13 FY15/CY14
NRB 1.3 1.3 1.2 1.3
SKF 2.9 2.4 2.3 2.4
FAG 2.9 2.7 2.1 2.2
TIMKEN 3.7 2.8 2.7 3.2
RoCE (post tax) FY12/CY11 FY13/CY12 FY14/CY13 FY15/CY14
NRB 13.7% 11.4% 9.3% 11.4%
SKF 22.4% 17.5% 11.4% 10.9%
FAG 24.2% 16.0% 9.7% 11.9%
TIMKEN 18.8% 12.3% 10.4% 19.6%
Imported RM as a % of total RM FY12/CY11 FY13/CY12 FY14/CY13 FY15/CY14
NRB 30% 28% 28% 28%
SKF 43% 21% 27% 20%
FAG 30% 34% 36% 39%
TIMKEN 36% 36% 27% 21%
Exports as a % of revenue FY12/CY11 FY13/CY12 FY14/CY13 FY15/CY14
NRB 13% 22% 23% 25%
SKF 6% 7% 8% 8%
FAG 12% 14% 16% 18%
TIMKEN 25% 26% 33% 37%
WC days FY12/CY11 FY13/CY12 FY14/CY13 FY15/CY14
NRB 131 144 154 157
SKF 47 49 54 47
FAG 42 55 56 59
TIMKEN 68 110 109 100
Timken’s EBITDA margin has significantly improved in FY15 (1QFY16 improved
further to 16.9%). Similarly the company has seen a steep improvement in traded
business gross margin
The company has also witnessed a steady reduction in imported raw material and
components. This helps reduce FX risk and potentially lower raw material costs
Among the key competitors, Timken has seen a steady improvement in traded
revenues. We believe, the steady increase suggests that Timken is able to cater to
new end-markets, new products by importing the bearings. As the potential for the
segment improves significantly (over time), the bearings can be locally manufactured
Significant improvement in asset turns (including traded revenue) also resulted in
steep jump in RoCE
Timken has also witnessed a significant improvement in exports proportion. This
enables improving fixed asset utilisation and provides a captive growth driver. We
have witnessed other companies such as Wabco India, where the US based parent
has significantly scaled up sourcing from the Indian subsidiaries as a drive to
improve profitability
Timken India’s working capital days is however at the higher end, this is primarily on
the back of significantly lower creditor days and not due to debtors / inventory
R&D Expenses FY12/CY11 FY13/CY12 FY14/CY13 FY15/CY14
NRB 1.0% 1.2% 1.3% 1.1%
SKF - - - -
FAG 0.5% 0.7% 0.9% 0.6%
TIMKEN - - - -
Royalty as a % of Manufactured revenue FY12/CY11 FY13/CY12 FY14/CY13 FY15/CY14
NRB - - - -
SKF 5.0% 4.0% 5.0% 5.0%
FAG 2.4% 2.5% 2.3% 2.3%
TIMKEN 2.9% 3.0% 3.5% 3.1%
Revenue Mix comparison NRB SKF FAG Timken
Auto – Domestic 75% 43% 35% 25%
OEM 59% 29% 23% NA
After Market 17% 14% 12% NA
Industrial - Domestic - 49% 51% 38%
OEM - 18% 33% NA
After Market - 30% 18% NA
Exports 25% 8% 14% 37%
Timken India CMP
Rs. 564
Target
Rs. 666
Rating
BUY
Timken has the lowest cash as a % of total capital employed
Source: Company, Spark Capital
Cash/capital employed FY13/CY13 FY14/CY13 FY15/CY14
SKF India 28% 31% 53%
Timken India 13% 11% 9%
FAG India 22% 24% 29%
Page 16
Valuations and asset allocation
CMP MCAP P/E EV/EBITDA PAT CAGR EBITDA CAGR
Rs. Rs. mn FY14/CY13 FY15/CY14 FY16E/CY15E FY17E/CY16E FY14/CY13 FY15/CY14 FY16E/CY15E FY17E/CY16E FY15-FY17 FY15-FY17
NRB 115 11,146 29.2 21.4 18.0 12.0 13.9 11.6 10.7 8.1 33% 19%
SKF India 1232 64,940 35.9 32.0 28.9 20.8 23.4 21.5 19.5 13.5 24% 23%
Timken
India 564 38,312 85.6 47.5 35.6 25.4 53.3 27.3 21.5 16.0 37% 31%
FAG India 4135 68,725 56.4 45.0 35.9 30.5 36.1 27.1 21.6 18.0 22% 20%
SKF and FAG : CY13, CY14, CY15, CY16; FAG is based on Consensus estimates
We believe Timken is the best placed bearing company in terms of future growth
prospects, primarily on the back of visibility in the key end-markets and high
market shares in the segments that the company is present in.
In terms of capital allocation, we see Timken as the most efficient as the cash as
a % of capital employed is the lowest at ~10% vs. 50% for SKF and 30% for
FAG. Timken has also planned for capacity expansion reflecting the growth
drivers in Railways, Commercial Vehicles and Exports
As seen is the peer comparison in slide 15, Timken’s return ratio’s is the best.
We also see the expected PAT and EBITDA growth being highest for Timken.
Accordingly, Timken trades at 25x FY17 EPS, still below FAG at 30x
We assign a Buy rating for Timken India with a price target of Rs. 666, based on
30x FY17 EPS. Based on our target multiple, PEG ratio is ~0.8x, still below the
peers and in-line with other well placed auto component manufacturers such as
Amara Raja batteries and Wabco India
Timken India CMP
Rs. 564
Target
Rs. 666
Rating
BUY
Page 17
Financial Summary
Abridged Financial Statements Key metrics
Rs. mn FY14 FY15 FY16E FY17E FY14 FY15 FY16E FY17E
Profit & Loss Growth ratios
Revenues 7,201 9,349 11,231 14,121 Revenues 4.6% 29.8% 20.1% 25.7%
Manufacturing & Other Expenses 6,486 7,953 9,450 11,741 EBITDA -2.6% 95.1% 27.5% 33.7%
EBITDA 716 1,396 1,781 2,380 PAT 1.2% 80.3% 33.5% 40.1%
Depreciation 158 168 196 232 Margins
EBIT 558 1,229 1,585 2,148 EBITDA 9.9% 14.9% 15.9% 16.9%
Net Interest Exp / (inc) 9 6 10 10 EBIT 7.7% 13.1% 14.1% 15.2%
Profit Before Tax 657 1,223 1,584 2,218 PAT 6.2% 8.6% 9.6% 10.7%
Tax 209 416 507 710 Leverage & WC ratios
Adj. Net Profit 447 807 1,077 1,508 Current ratio (x) 2.9 2.8 2.7 2.6
Balance Sheet (Rs. mn) Debtor days (Sales) 76 68 68 69
Shareholders Equity 3,823 4,384 5,134 6,232 Inventory days (Sales) 70 66 68 68
Loan funds 32 25 25 25 Creditor days (Sales) 38 34 35 36
Sources of Funds 3,856 4,410 5,159 6,257 Performance & turnover ratios
Net block 965 1,069 1,622 1,890 RoACE 10.4% 19.6% 22.5% 25.6%
Capital WIP 256 268 268 268 RoAE 12.4% 19.7% 22.6% 26.5%
Current assets, loans & advances 3,498 4,311 4,864 6,201 Total asset turnover (x) 1.3 1.5 1.6 1.8
Current liabilities & provisions 1,141 1,444 1,801 2,307 Fixed asset turnover (x) 2.7 3.2 3.3 3.5
Net Current Assets 2,356 2,867 3,063 3,893 Valuation metrics
Application of funds 3,856 4,410 5,159 6,257 Current price (Rs.)
Cash Flows (Rs. mn) Shares outstanding (mn) 68 68 68 68
Cash flows from operations 457 447 827 1,057 Market capitalisation (Rs. mn) 38,312 38,312 38,312 38,312
Capex (307) (264) (750) (500) Enterprise value (Rs. mn) 38,143 38,100 38,269 38,040
Free Cash Flow 764 710 1,577 1,557 EV/EBIDTA (x) 53.3 27.3 21.5 16.0
Cash flows from investments (300) (256) (750) (500) Adj. Per-share earnings (Rs.) 6.6 11.9 15.8 22.2
Cash flows from financing (159) (257) (246) (328) Price-earnings multiple (x) 85.6 47.5 35.6 25.4
Closing Cash and Cash Equivalents 201 237 69 297 Dividend yield (%) 1.2% 0.5% 0.7% 0.9%
564
Timken India CMP
Rs. 564
Target
Rs. 666
Rating
BUY Disclaimer
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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
Investment banking/merchant banking/brokerage services
products or services other than those above
in connection with research report
No
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Whether the Research Analyst or Research Entity has been engaged in market making activity of the Subject Company; No
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Page 19