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Another quarter of subdued performance

Timken India continues to disappoint on revenue front in Q3FY24 as well. Revenue remained almost flat (0.5% up) YoY to Rs6,122mn (Centrum – Rs5,714mn / Consensus – Rs6,425 mn). Dec-23 results presentation of Timken Co, US have highlighted that organic revenue “up” in India though. We estimate ~35% YoY decline in export to Rs793mn led to flat revenue performance. However, improvement registered in Gross margin YoY by 99 bps to 40.5% (Centrum – 41.5%). This coupled with 8% YoY decline in employee cost arrested EBITDA margin fall to just 27 bps YoY to 16.7% (Centrum – 16.7% / Consensus-19.1%). With no YoY growth in revenue coupled with a 26% YoY drop in other income off-set the gains led by a surprising YoY decline of 8% & 6% in the employee cost & depreciation respectively and a flat tax rate. This has resulted in a YoY drop of 4.3% in the PAT to Rs675mn vs Rs705mn (Centrum – Rs630mn / Consensus - Rs940 mn). PAT margin at 11% vs 11.6% YoY, a drop of 55 bps (Centrum – 11% /Consensus- 14.6%). We estimate tepid revenue and PAT CAGR for FY23-FY26E at 7.8% and 3.8% as against FY21-FY23 revenue and PAT CAGR of 41% and 65% respectively. We maintain SELL (42x1HFY26E EPS of Rs 55) with TP of Rs2,297 (Unchanged).

Exports estimated to remain under pressure for the fifth quarter in a row

Likely disappointment on exports front led to a flat revenue in Q3FY24. We have tried to calculate total exports by the company in Q3FY24 at Rs793mn from its related party disclosures. Its share in the revenue also estimated to drop to 13% vs 20% YoY. The domestic business has grown just at ~9% YoY which was not at high enough rate to offset decline in exports. Exports have registered a YoY decline of 20%/ 24%/ 38%/ 29% /35% respectively for the preceding five quarters. We estimate continuation of headwinds for the exports for the next few quarters. We have cut our exports estimate by 18% for FY24E to Rs5,160mn from Rs6,298mn earlier. This is a 32% YoY drop over FY23.

Gross margin surge and drop in employee cost arrested a big fall in EBIDTA margin

Timken India has performed well on margins front. In spite of adverse operating leverage, EBIDTA margin contracted by just 27 bps YoY to 16.7% mainly due to 99 bps expansion in Gross margin to 40.5% and 8% YoY decline in employee cost at Rs384mn. However, at 16.7%, the EBITDA margin has been the lowest in the past five quarters.

PAT declined mainly due to flat revenue and decline in other income

With no YoY growth in revenue coupled with 26% YoY drop in other income off set the gains led by a YoY decline of 8% & 6% in the employee cost & depreciation respectively and a flat tax rate. This has resulted in a YoY drop of 4.3% in the PAT to Rs675mn. PAT margin at 11% vs 11.6% YoY, a drop of 55 bps.

We maintain SELL on the stock

With sustained decline in exports since past few quarters and not high enough revenue growth rate in the domestic market, coupled with likely headwinds in the cyclical MHCV industry are looming, we estimate Timken India to see deceleration in revenue & PAT growth along with range bound margins. We recommend Sell with TP of Rs2,297(42x 1HFY26E EPS of Rs55).

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