Buy Timken India Ltd For Target Rs.1,245 - HDFC Securities
Timken India (TIL) is a subsidiary of The Timken Company, a US based leading manufacturer of taper roller bearings. It serves diverse sectors such as Aerospace, Construction, Railroad, Automotive, Mining and Energy among others with offerings. In July 2017, TIL announced the acquisition of ABC Bearings (ABC) which was completed in Aug-18. With the acquisition of ABC bearings, TIL has expanded its market share in tapered roller bearing and also got an entry into wheel end bearings. The modernization plans of Indian Railways coupled with metro rail projects across the country are the growth catalysts for the company going forward. Further, post the COVID19 crisis, we expect an uptick in demand in CV segment which augurs well for the company. The company has a strong support from its parent. TIL is a net debt free company with efficient working capital cycle and strong return ratios.
View & Valuation:
Post the acquisition of ABC bearings, TIL has expanded its market share in tapered roller bearing and also got an entry into wheel end bearings. It has completed its expansion plans and the additional capacity has become operational. Capacity utilization at Bharuch plant is also ramping up. Higher procurement of LHB coaches by Railways where cost of bearings used is 2.5-3x, new wagon procurements for DFC, pick-up in segments like renewable and demand from newer segments like Indian Navy are strong growth drivers.
The management expects traction in railway orders and pick up in the CV demand going forward. Management is planning to increasingly shift some of the manufacturing to ABC’s Bharuch plant by incurring a capex of Rs 35-40cr and produce ‘Timken brand’ bearings for export market including to the European wind energy market. Bharuch plant has a better cost structure and should aid in margin expansion. Timken India is a net debt free company with robust return ratios, hence we expect company to weather the current slowdown storm and bounce back strongly in FY22. Delay in DFC completion and COVID has just pushed the opportunity for TIL by a few quarters. The stock is trading at ~38.4x FY22E earnings. We feel investors may buy the stock on dips to Rs. 1080-1088 band (~36.5X FY22E earnings) and add further on dips to Rs. 992-998 band (~33.5x FY22E earnings). We feel the base case fair value of the stock is Rs. 1188 (~40x FY22E earnings) and bull case fair value of Rs. 1245 (~42.0x FY22E earnings).
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