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Strong demand in Railway, export to recover from H2

In Q4FY24, Timken India reported revenue of c.INR 8.9bn up 12% YoY and 47% QoQ mainly driven by strong order execution in railway and was above 15%/10% from JMFL/Consensus estimate respectively. EBITDA grew c.30% YoY to INR 1.9bn with an OPM of c.22.1% vs 19.1% YoY and 16.7% QoQ mainly led by strong product mix and operating leverage. PAT was up 35% YoY to INR c.1.4bn. We transfer the coverage to Deepak Agarwal and maintain BUY with a TP of 3,670.

* Strong domestic demand, export yet to recover: Demand in the domestic market continues to remain healthy mainly driven by Railway and Process industries like Steel, Cement etc. Also, Rail demand also remains strong in South America. Demand for Heavy truck continues to remain soft in abroad markets and is expected to recover in H2FY25. Wind demand was also muted in China. Also, Elections in US from Nov,24 will create uncertainties of demand there.

* Railway remains the key growth driver followed by process: India is expanding its railway track lines, electrification, developing dedicated frieght coridors, focusing on increasing Vande bharat trains which will led to strong demand for wagons, locomotives,etc. On an average 8 bearings goes into a wagon. In FY24, Railway revenue was up c.20% YoY and contributed c.20% of sales vs 17% in FY23. Timken has c.50% market share in Railway bearings in India. Also, companies in Steel, cement industries are aggresively investing in setting up new facilties which will further create demand for the process segment. Process segment grew c.23% YoY and contributed c.19% of sales in FY24.

* Capex on cards to cater new opportunities: Timken is now looking to capture new opportunites from Railways, Solar, Wind, etc. It will do a capex of INR 4bn in FY25 and its new plant for SRB (Spherical Roller Bearings) and CRB (Cylindrical Roller Bearings) will be operational by FY25 end and most of the capacity will be utilised for domestic demand. Also, it has developed the technologies for rotating solar panel ahead of its peers which will help it to cater new opportunities.

* Margins improved on back of operating leverage: In Q4FY24 margins expanded by c.310bps YoY and c.540bps QoQ to 22.1% mainly led by better product mix and operating leverage

* We resume coverage with BUY rating and TP of INR 3,670: We expect revenue/earning CAGR of 19%/25% over FY24-26 mainly led by (1) Strong demand from the railway industry, (2) Strong capex in the Process industry like Steel, Cement and Infrastructure, (3) Capturing the new opportunities, (4) capacity expansion to cater industry tailwinds and (5) China+1 will further add up to the revenue and earning growth. At CMP the stock trades at a P/E of 52x/42x on FY25 and FY26 EPS. We transfer the coverage to Deepak Agarwal and value the company at P/E multiple of 45x on FY26 EPS to arrive at TP of INR 3,670 up 8% from CMP and hence we maintain BUY.

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