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- 2015 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 +91-22-3926 8114 Key Data Current Shares O/S (mn) 68.0 Market Cap (Rsbn/US$mn) 36.4/539.5 52 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 2,758 15.8 7.4 9,290 10,619 14.3 Raw materials consumed 1,475 1,586 1,593 8.0 0.4 5,576 6,387 14.5 % of sales 61.9 61.8 57.8 - - 60.0 60.1 - Employee costs 164 152 173 5.2 13.4 668 681 1.9 % of sales 6.9 5.9 6.3 - - 7.2 6.4 - Other expenditure 432 493 502 16.3 1.9 1,709 1,927 12.7 % of sales 18.1 19.2 18.2 - - 18.4 18.1 EBITDA 311 336 490 57.7 45.8 1,337 1,625 21.5 EBITDA (%) 13.1 13.1 17.8 - - 14.4 15.3 - Other income 4 13 6 64.1 (50.8) 60 57 (4.9) Exceptional items - (10) (20) - - - 30 Interest costs 2 2 4 193.3 120.0 6 9 61.4 Depreciation 43 52 72 68.7 37.1 168 225 33.9 PBT 271 305 441 62.7 44.4 1,223 1,418 15.9 Total tax 99 104 166 67.8 59.3 416 499 19.8 Effective tax rate (%) 36.5 34.1 37.6 - - 34.0 35.2 - Net profit (+) / loss (-) 172 201 275 59.8 36.7 807 919 13.9 NPM (%) 7.2 7.8 10.0 - - 8.7 8.7 -
Exhibit 1: Key financials Revenue 7,201 9,290 10,619 12,303 14,373 YoY (%) 4.6 29.0 14.3 15.9 16.8 EBITDA 716 1,337 1,625 1,810 2,147 EBITDA (%) 9.9 14.4 15.3 14.7 14.9 Adj. PAT 448 807 919 1,062 1,261 YoY (%) 1.2 80.3 13.9 15.6 18.8 FDEPS (Rs) 6.6 11.9 13.5 15.6 18.6 RoE (%) 12.4 19.7 19.1 18.7 18.9 RoIC (%) 12.8 23.4 23.9 22.5 23.1 P/E (x) 81.3 45.1 39.6 34.2 28.8 EV/EBITDA (X) 50.6 27.0 22.2 19.9 16.6 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 2,758 15.8 7.4 3,210 (14.1) EBITDA 311 336 490 57.7 45.8 381 28.8 EBITDA (%) 13.1 13.1 17.8 472 bps 468 bps 11.9 592 bps Reported PAT 172 201 275 59.8 36.7 225 22.4 Source: Company, Bloomberg, Nirmal Bang Institutional Equities Research 2 Timken India
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 (%) 14.1 14.4 14.7 14.9 57 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) 60 50 40 30 20 10 0 (Rs) 700 600 500 400 300 200 100 0 P/E 10-year mean +1sd -1sd Source: NSE, Nirmal Bang Institutional Equities Research Stock price 10x 15x 20x 25x 30x 3 Timken India
Financials Exhibit 5: Income statement Net revenue from product sale 6,814 8,858 10,104 11,696 13,655 Sale of services 288 306 375 450 540 Other operating income 99 125 140 156 178 Revenue from operations 7,201 9,290 10,619 12,303 14,373 Other income 108 59 57 62 65 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) 30-30 30 Employee benefit expenses 529 668 681 762 877 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 158 168 225 249 288 EBIT 558 1,169 1,401 1,561 1,860 Financial charges and interest 9 6 9 14 14 PBT (before exceptional items) 657 1,223 1,448 1,609 1,911 Exceptional item - - 30 - - PBT 657 1,223 1,418 1,609 1,911 Total tax 209 416 499 547 650 Profit after tax 448 807 919 1,062 1,261 Exhibit 7: Balance sheet Share capital 680 680 680 680 680 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 90 106 116 116 116 Other long-term liabilities 16 18 20 21 21 Long-term borrowings - - - - - Long-term provisions 74 88 95 95 95 Current liabilities 1,084 1,363 1,671 1,857 2,151 Short-term borrowings 32 25 43 85 85 Trade payables 730 860 1,130 1,267 1,428 Other current liabilities 221 346 272 320 452 Short term provisions 100 132 226 185 185 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 256 268 208 100 100 Intangible assets development - - 1 - - Non-current Investments - - 0 0 0 Deferred tax assets (net) 45 39 33 33 33 Long-term loans and advances 163 233 396 233 233 Current assets 3,568 4,245 5,015 5,602 7,071 Current investments 233 166 384 50 100 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 201 237 334 479 871 Short-term loans and advances 202 316 304 367 490 Other current assets 78 108 192 250 400 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 108 59 57 62 65 Depreciation 158 168 225 249 288 Tax paid (-) (209) (416) (499) (547) (650) Inc/(dec.) in other long-term liabilities 3 2 2 1 - (Inc)/dec. in long-term assets (-) (37) (70) (163) 163 - Net cash flow from operations 334 490 826 857 830 Capital expenditure (-) (301) (263) (452) (910) (210) Net cash flow after capex 33 227 374 (53) 620 (Inc.)/dec. in invest. & non-current assets - - - - - (Inc)/dec. in current investment 85 67 (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) 18 42 - Inc./(dec.) in long-term borrowing - - - - - Equity issue/(buyback) 512 - - - - Cash flow from financial activities (141) (259) (73) (136) (177) Others 83 1 13 - - Opening cash balance 140 201 237 334 479 Closing cash balance 201 237 334 479 871 Change in cash balance 61 36 97 145 392 Exhibit 8: Key ratios Y/E March FY14 FY15 FY16 FY17E FY18E FY14 Per share (Rs) EPS 6.6 11.9 13.5 15.6 18.6 CEPS 8.9 14.3 16.8 19.3 22.8 BVPS 56.2 64.5 76.8 90.0 106.2 DPS 6.5 3.0 1.0 2.0 2.0 Dividend payout (%) 98.7 25.3 7.4 12.8 10.8 Valuation (x) P/E 81.3 45.1 39.6 34.2 28.8 P/BV 9.5 8.3 7.0 5.9 5.0 EV/EBITDA 50.6 27.0 22.20 19.9 16.6 M-cap/ sales 5.1 3.9 3.4 3.0 2.5 EV/sales 5.0 3.9 3.4 2.9 2.5 Return ratios (%) RoANW 12.4 19.7 19.1 18.7 18.9 RoACE 11.6 21.6 21.8 20.7 21.2 RoAIC 12.8 23.4 23.9 22.5 23.1 Margins (%) EBITDA margin 9.9 14.4 15.3 14.7 14.9 EBIT margin 7.7 12.6 13.2 12.7 12.9 Tax/PBT 31.9 34.0 35.2 34.0 34.0 Net profit margin 6.2 8.7 8.7 8.6 8.8 Expense ratios (% of revenue) Cost of materials consumed 33.4 32.6 33.4 32.4 32.7 Traded goods 28.6 27.0 26.7 28.1 27.9 Employee benefit expenses 7.3 7.2 6.4 6.2 6.1 Total expenses 90.1 85.6 84.7 85.3 85.1 Turnover and working capital ratios Debtor period (days) 75 68 67 67 67 Inventory period (days) 98 96 92 93 93 Creditor period (days) 59 55 63 60 58 Cash conversion cycle (days) 114 109 96 100 102 Fixed assets turnover (x) 2.7 3.2 3.2 3.0 3.1 Non cash net working capital (Rsmn) 2081 2503 2670 3301 4035 4 Timken India
Rating track Date Rating Market price (Rs) Target price (Rs) 4 January 2016 Buy 550 650 12 February 2016 Buy 431 650 23 May 2016 Buy 535 650 5 Timken India
Disclaimer Stock Ratings Absolute Returns BUY > 15% ACCUMULATE -5% to15% SELL < -5% This report is published by Nirmal Bang s Institutional Equities Research desk. Nirmal Bang group has other business units with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. Reports based on technical and derivative analysis may not match with reports based on a company's fundamental analysis. This report is for the personal information of the authorised recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information for the clients of Nirmal Bang Equities Pvt. Ltd., a division of Nirmal Bang, and should not be construed as an offer or solicitation of an offer to buy/sell any securities. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Nirmal Bang or any persons connected with it do not accept any liability arising from the use of this document or the information contained therein. The recipients of this material should rely on their own judgment and take their own professional advice before acting on this information. Nirmal Bang or any of its connected persons including its directors or subsidiaries or associates or employees or agents shall not be in any way responsible for any loss or damage that may arise to any person/s from any inadvertent error in the information contained, views and opinions expressed in this publication. Nirmal Bang Equities Private Limited (hereinafter referred to as NBEPL ) is a registered Member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited. NBEPL has registered with SEBI as a Research Entity in terms of SEBI (Research Analyst) Regulations, 2014. (Registration No: INH000001436-19.08.2015 to 18.08.2020). NBEPL or its associates including its relatives/analyst do not hold any financial interest/beneficial ownership of more than 1% in the company covered by Analyst. NBEPL or its associates/analyst has not received any compensation from the company covered by Analyst during the past twelve months. NBEPL /analyst has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market-making activity of the company covered by Analyst. The views expressed are based solely on information available publicly and believed to be true. Investors are advised to independently evaluate the market conditions/risks involved before making any investment decision. Access all our reports on Bloomberg, Thomson Reuters and Factset. Team Details: Name Email Id Direct Line Rahul Arora CEO rahul.arora@nirmalbang.com - Girish Pai Head of Research girish.pai@nirmalbang.com +91 22 3926 8017 / 18 Dealing Ravi Jagtiani Dealing Desk ravi.jagtiani@nirmalbang.com +91 22 3926 8230, +91 22 6636 8833 Pradeep Kasat Dealing Desk pradeep.kasat@nirmalbang.com +91 22 3926 8100/8101, +91 22 6636 8831 Michael Pillai Dealing Desk michael.pillai@nirmalbang.com +91 22 3926 8102/8103, +91 22 6636 8830 Umesh Bharadia Dealing Desk umesh.bharadia@nirmalbang.com +91-22-39268226 Nirmal Bang Equities Pvt. Ltd. Correspondence Address B-2, 301/302, Marathon Innova, Nr. Peninsula Corporate Park, Lower Parel (W), Mumbai-400013. Board No. : 91 22 3926 8000/1; Fax. : 022 3926 8010 6 Timken India