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Superior mix and low disruption risk to drive re-rating

Timken India (TMKN) reported robust year where net sales came in INR22bn; +56% YoY, while EBITDA came in at INR 5.1bn; +56% YoY. Strong bounce back in exports (+90% YoY), coupled with strong growth process industries (wind energy sales doubled) and distribution segment (+40% YoY) pushed revenue growth, while a better sales mix resulted in EBITDA margin expansion of 540bps YoY to 23.2% (4Q22 margin at 26.9%). We believe similar growth trend in FY22-24, driven by a) large tender of 90,000 wagons by Indian Railways, with additional volumes for DFC corridor and high speed rail rolling stock, b) continued traction in exports, as production from Bharuch plant is ramped up post qualification under Timken Circle R; India continues to be a low cost manufacturing base and c) cyclical uptick in CV volumes as monthly volumes are nearing FY19 peak levels. We believe Timken India’s business mix is superior to its peers due to low competition due to high share of exports/railways, lowest threat of EV disruption due to absence in 2W/PVs and a dominant share in their niche segments (differential and pinion bearings in CVs). We revise our TP to INR 2,700, valuing the company at 40x FY24E EPS, a 20% premium to its long term median PE of 33x 1-year forward, as we forecast 25% EPS CAGR (vs 17% CAGR over last 5/10 years) with RoEs of 23% (vs average RoE of 15% in last 10 years).

Quarterly numbers beat estimates on all fronts:

Net sales recorded robust growth of 40% YoY to INR 6.7bn, (17% above JMFe), ahead of peers (SKF: 23% YoY; SCHFL: 19% YoY). Management highlighted that company witnessed double digit growth across segments with robust growth in exports (30% of sales) coupled with strong traction in demand from process industries (13% of sales) – mainly wind energy. Favourable sales mix led to a beat in EBTIDA margins, which offset impact of RM inflation and higher freight rates. EBTIDA grew by 107% YoY, clocking highest ever margins at 27%.

Focus on gross margins to continue:

Despite sharp inflation in commodities and ocean freight rates, the company has seen negligible impact on margins. The same is a function of higher exports (+90%) and strong distribution segment sales (+40%). We believe EBITDA margins would sustain in range of c.23-24% over FY22-24E as sales mix normalises, but improvement in utilisations at the ABC plant and continued price pass through. We believe revenue growth can surprise positively if large freight wagon order materialises as per targets and a cyclical uptick in CVs.

Robust outlook across segment:

Railways, CVs and process industries jointly constitute 51% of sales, which is likely to grow at a healthy pace, given increased capex by Indian Railways, continued traction in wind gearbox exports and positive demand momentum in CVs. Exports is likely to improve further, due to diversification of supply chain from China by customers, where India scores, being a low cost manufacturer.

Upgrade to BUY with TP of INR 2,700:

Valuations remain a tad expensive at 34x FY24 vs 5-year median of 35x and 10-year median of 33x. However, a better EPS growth profile of 25% CAGR over FY22-24E (vs 17% CAGR in past 5/10 years) and superior RoE of 22- 23% vs 16% in past 10 years is likely to drive re-rating in the stock. Upgrade to BUY

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CIN Number : L67120MH1986PLC038784

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