Timken India. Institutional Equities. 4QFY16 Result Update BUY. Margin Expansion Leads To Huge Growth In Profit; Retain Buy

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1 4QFY16 Result Update Institutional Equities Timken India 23 May 2016 Reuters: TMKN.BO; Bloomberg: TIMK IN Margin Expansion Leads To Huge Growth In Profit; Retain Buy Timken India (TIL), the leading manufacturer of TRBs (Tapered Roller Bearings), reported total net revenue growth of 15.8% YoY to Rs. 2,758mn in 4QFY16, which is14%/4% lower than our/bloomberg consensus estimates. This is the ninth consecutive quarter of double-digit YoY growth in total net revenue. We believe that revenue growth in this quarter has been driven by uptick in the exports. TIL management has hinted at healthy growth in exports for FY16 during December quarter post result interaction. It is to be noted that December-2015 quarter has witnessed a mere 2% YoY surge in exports. In 4QFY16, EBITDA grew by 57.7% YoY at Rs490mn (Our estimate-rs381mn/bloomberg estimate Rs373mn) on account of margin expansion of whopping 472bps YoY to 17.8%. (Our estimate- 11.9%/Bloomberg estimate 13.0%). A YoY EBITDA growth rate and EBITDA margin were highest in the past five and seven sequential quarters, respectively. EBITDA margin expansion was mainly driven by 401bps gross margin expansion to 42.2% and 71bps operating efficiency gains (lower employee cost and other expenses as percentage of revenue). PAT grew 20% YoY to Rs275mn, the highest in past five quarters sequentially (our estimate-rs225mn/bloomberg estimate-rs222mn) with PAT margin expanding by 275bps YoY to 9.9% (our estimate- 7.0%/Bloomberg estimate-7.7%). Higher-than-expected EBITDA margin was main driver of betterthan-expected PAT margin in 4QFY16. EBITDA margins are surging since last few quarters and we have revised our earlier EBITDA margin estimates for FY17E/FY18E by ~50bps each. We expect margins to remain at an elevated level but lower than that witnessed in FY16 on account of estimated decline in the gross margin and surge in employee costs. Higher than estimated revenue growth and further rationalisation of raw material costs might lead to higher than estimated EBITDA margin. On account of lower-than-estimated revenue in FY16, we have pruned our FY17E/FY18E revenue estimates by 4.8%/3.7%, respectively. We expect revenue CAGR of 16% over FY15-FY18E, given the dominant market share of the company in high-growth railway and medium and heavy commercial vehicle or MHCV segments. PAT CAGR is expected at 17% over the same period. TIL has better revenue visibility and growth coupled with superior margin profile with better return ratios as compared to its peers under our coverage universe in the bearings space. We have retained Buy rating on TIL with an unchanged target price of Rs650, which discounts FY18E EPS of Rs18.6 by 35x. BUY Sector: Industrial Goods CMP: Rs535 Target Price: Rs650 Upside: 21% Sameer Panke sameer.panke@nirmalbang.com Key Data Current Shares O/S (mn) 68.0 Market Cap (Rsbn/US$mn) 36.4/ Wk High /Low (Rs) 652/397 Daily Volume (3M NSE Avg.) 36,841 Price Performance (%) 1 M 6 M 1 Yr Timken India 1.6 (8.3) (11.7) Nifty Index (2.1) (1.4) (8.0) Source: Bloomberg Y/E March (Rsmn) 4QFY15 3QFY16 4QFY16 Chg. (YoY)% Chg. (QoQ)% FY15 FY16 Chg. (YoY)% Net sales 2,382 2,567 2, ,290 10, Raw materials consumed 1,475 1,586 1, ,576 6, % of sales Employee costs % of sales Other expenditure ,709 1, % of sales EBITDA ,337 1, EBITDA (%) Other income (50.8) (4.9) Exceptional items - (10) (20) Interest costs Depreciation PBT ,223 1, Total tax Effective tax rate (%) Net profit (+) / loss (-) NPM (%)

2 Exhibit 1: Key financials Revenue 7,201 9,290 10,619 12,303 14,373 YoY (%) EBITDA 716 1,337 1,625 1,810 2,147 EBITDA (%) Adj. PAT ,062 1,261 YoY (%) FDEPS (Rs) RoE (%) RoIC (%) P/E (x) EV/EBITDA (X) Key highlights of FY16 Revenue growth TIL clocked a YoY revenue growth of 14.3% for FY16 on the higher base of FY15. Although, this has been lower than our estimate of 19.1% growth for FY16, never the less it has been substantially higher than its peers who have witnessed lower single digit revenue growth in the last financial year on comparable basis. We expect revenue CAGR of 16% over FY16-FY18E for TIL and will remain the highest amongst our coverage universe in the bearings space. TIL is the largest listed player in Rs8bn-Rs10bn annual railway segment and has been appointed by Indian Railways for selecting the bearing technology for its Dedicated Freight Corridor (DFC) project. This project has been the additional opportunity beyond FY18 for TIL. Exports We believe that TIL likely to continue with its double digit YoY growth in exports going forward as well, although 3QFY16 witnessed less than 2% YoY growth. We believe that the revenue growth in 4Q FY16 has been driven to a larger extent by surge or bounce back of exports as hinted by the management in an interaction post 3QFY16 results. The company exports its products to the US, Australia, Mexico, Brazil, Argentina etc. Margins- TIL is optimistic on maintaining its margins, given raw material cost tailwinds and value addition by introducing new products, tapping new segments and clients. TIL is determined to penetrate further in domestic market. The company believes in the profitable growth which provides optimistic outlook on the margin front. Capacity utilisation and capex- The current capacity utilisation is 80%. The company is going for capex of Rs1.30bn at Jamshedpur plant. The enhanced capacity will get commercialised in FY17. We believe that the company has incurred a capex of ~Rs450mn in FY16. Working capital TIL has shown improvement in working capital cycle. The cash conversion cycle has lowered from 109 days as of FY15 to 96 days in FY16. We estimate the cash conversion cycle to remain at around 100 days for FY17 and FY18. Exhibit 2: Actual performance versus our estimates Exceptional item During FY16, TIL s third party service provider s warehouse was destroyed in a fire which has resulted in the inventory loss of Rs 98mn and fixed assets loss worth Rs0.3mn. TIL has provided Rs60.7mn during 1QFY16 towards this. However, during the year, TIL provision has been reduced to Rs30mn on account of receipt of insurance claims and recovery from third party service provider. Y/E March (Rsmn) 4QFY15 3QFY16 4QFY16 Chg. (YoY)% Chg. (QoQ)% 4QFY16E Devi (%) Revenue 2,382 2,567 2, ,210 (14.1) EBITDA EBITDA (%) bps 468 bps bps Reported PAT Source: Company, Bloomberg, Nirmal Bang Institutional Equities Research 2 Timken India

3 May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May-16 May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May-16 Institutional Equities Exhibit 3: Change in our earnings estimates Y/E March Old New Variation (%) (Rsmn) FY17E FY18E FY17E FY18E FY17E FY18E Revenue 12,929 14,926 12,303 14,373 (4.8) (3.7) EBITDA 1,828 2,144 1,810 2,147 (1.0) 0.1 EBITDA (%) bps 57 bps Reported PAT 1,068 1,262 1,062 1,261 (0.5) (0.1) Source: Company, Bloomberg, Nirmal Bang Institutional Equities Research Exhibit 4: P/E trend (x) (Rs) P/E 10-year mean +1sd -1sd Source: NSE, Nirmal Bang Institutional Equities Research Stock price 10x 15x 20x 25x 30x 3 Timken India

4 Financials Exhibit 5: Income statement Net revenue from product sale 6,814 8,858 10,104 11,696 13,655 Sale of services Other operating income Revenue from operations 7,201 9,290 10,619 12,303 14,373 Other income Total revenue 7,310 9,349 10,676 12,365 14,438 Cost of materials consumed 2,435 3,219 3,754 4,249 4,971 Purchase of stock-in-trade 2,059 2,504 2,838 3,456 4,017 Changes in the inventories (27) (194) (206) (265) (275) Excise duty and cess (11) Employee benefit expenses Other expenses 1,500 1,725 1,926 2,260 2,605 Total expenses 6,486 7,953 8,994 10,492 12,225 EBITDA 716 1,337 1,625 1,810 2,147 Depreciation EBIT 558 1,169 1,401 1,561 1,860 Financial charges and interest PBT (before exceptional items) 657 1,223 1,448 1,609 1,911 Exceptional item PBT 657 1,223 1,418 1,609 1,911 Total tax Profit after tax ,062 1,261 Exhibit 7: Balance sheet Share capital Reserves and surplus 3,143 3,705 4,541 5,440 6,537 Net worth 3,823 4,384 5,221 6,120 7,217 Non-current liabilities Other long-term liabilities Long-term borrowings Long-term provisions Current liabilities 1,084 1,363 1,671 1,857 2,151 Short-term borrowings Trade payables ,130 1,267 1,428 Other current liabilities Short term provisions Total 4,997 5,854 7,008 8,093 9,484 Total gross block 2,807 3,057 3,569 4,587 4,797 Accumulated depreciation 1,842 1,989 2,213 2,462 2,750 Net fixed assets 965 1,069 1,355 2,125 2,048 Capital work in progress Intangible assets development Non-current Investments Deferred tax assets (net) Long-term loans and advances Current assets 3,568 4,245 5,015 5,602 7,071 Current investments Inventories 1,368 1,675 1,859 2,198 2,572 Trade receivables 1,486 1,742 1,942 2,258 2,638 Cash and carry equivalents Short-term loans and advances Other current assets Total 4,997 5,854 7,008 8,093 9,484 Exhibit 6: Cash flow EBIT 558 1,169 1,401 1,561 1,860 Exceptional item (-) - - (30) - - (Inc.)/dec. in working capital (246) (422) (166) (632) (733) Other income Depreciation Tax paid (-) (209) (416) (499) (547) (650) Inc/(dec.) in other long-term liabilities (Inc)/dec. in long-term assets (-) (37) (70) (163) Net cash flow from operations Capital expenditure (-) (301) (263) (452) (910) (210) Net cash flow after capex (53) 620 (Inc.)/dec. in invest. & non-current assets (Inc)/dec. in current investment (217) 334 (50) Cash flow from investment activities (216) (196) (669) (577) (260) Interest paid (-) (9) (6) (9) (14) (14) Dividends paid (-) (676) (246) (82) (164) (164) Inc./(dec.) in short-term borrowing 32 (7) Inc./(dec.) in long-term borrowing Equity issue/(buyback) Cash flow from financial activities (141) (259) (73) (136) (177) Others Opening cash balance Closing cash balance Change in cash balance Exhibit 8: Key ratios Y/E March FY14 FY15 FY16 FY17E FY18E FY14 Per share (Rs) EPS CEPS BVPS DPS Dividend payout (%) Valuation (x) P/E P/BV EV/EBITDA M-cap/ sales EV/sales Return ratios (%) RoANW RoACE RoAIC Margins (%) EBITDA margin EBIT margin Tax/PBT Net profit margin Expense ratios (% of revenue) Cost of materials consumed Traded goods Employee benefit expenses Total expenses Turnover and working capital ratios Debtor period (days) Inventory period (days) Creditor period (days) Cash conversion cycle (days) Fixed assets turnover (x) Non cash net working capital (Rsmn) Timken India

5 Rating track Date Rating Market price (Rs) Target price (Rs) 4 January 2016 Buy February 2016 Buy May 2016 Buy Timken India

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