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Expanding addressable market to drive growth

Timken India is poised to benefit from macro tailwinds in bearings industry such as shift of manufacturing facilities to India, foray into new segments (CRB and SRB) and development of new verticals for growth such as defence & aerospace, F&B and medical equipment exports. Also, we expect the company to gain from a cyclical recovery over FY23-35 in its existing domestic segments i.e. commercial vehicles and railways. The company conducted a conference call to articulate its growth plans over next three to five years, key highlights were as follows: a) investment of INR6bn over next 24 months to expand its addressable market size including CRBs and SRBs (primarily used in mining, paper pulp and wind) with estimated industry size of INR37bn, b) continued shift of production lines by parent company can open up new vertical like defence & aerospace, food & beverages and medical equipment exports in future, c) large tender of 90,000 wagons by Indian Railways, with additional volumes for DFC corridor and high speed rail rolling stock, and d) cyclical uptick in CV volumes. However, outlook for exports remains uncertain in near term as order book remains healthy, but growth from Europe declined has slowed down. We maintain BUY with revised TP to INR 3,700, based on 45x FY25E EPS.

* Foray into CRB and SRB bearings: The company announced incremental investment of INR6bn towards new facility at Bharuch, Gujarat to enable manufacturing of CRBs/SRBs, which would provide them access to INR37bn domestic CRB/SRB market. Currently, these bearings are being imported from other group entities and sold in India; management expects indigenisation to be completed by Dec’24. Initially, CRBs and SRBs upto 400mm range will be manufactured locally and the range will be gradually expanded later.

* Softness in exports likely in the upcoming quarters: Exports have seen robust growth in FY22, forming 30% of sales in FY22 and 36% of sales in 1HFY23, as products from its Bharuch factory have qualified under Timken’s global supply chain. However, company highlighted that order book from Europe is declining, but we believe shifting of capacities from other global plants and China+1 strategy of global customers is likely to drive growth for the Indian plant, thus keeping sales mix favourable.

* Cyclical uptick in CVs and freight wagons to drive growth: Freight wagon ordering is expected to pick up pace as wagon production is up 60% in 1HFY23. We expect Timken to garner a lion’s share in 90,000 wagon ordering over next 3 years and increased ordering of high speed Vande Bharat passenger trains. Also, MHCV segment saw a robust growth of 75% YoY in 1HFY23 and we expect the monthly ordering to revert back to earlier peak of 40,000 units per month vs 28,000 currently.

* Maintain BUY with TP of INR 3,700: We forecast 24% earnings CAGR over FY22-25E, despite a high base (25% CAGR in past 5 years). We believe earnings growth is expected to accelerate post FY25 as new roller bearings facility is commissioned (capex over FY23- 25 will be 3x vs past 3 years) and assign a higher target PE multiple of 45x (vs 40x earlier) to capture this accelerate growth over FY25-27. We maintain BUY with revised TP of INR3,700 (vs INR3,200 earlier). Key risk: sharp increase in RM inflation.

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