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You are here : IndiaNotes >> Research & Analysis >> Companies >> Timken India Ltd. >> Research

Pick of the Week: Buy Timken at CMP and add on declines to Rs763-Rs783 band

HDFC Sec | 04 Dec, 2017  | Follow Author | Add to my Favourites 
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Timken India is a subsidiary of The Timken Company, which is a US based leading manufacturer of taper roller bearings. It was incorporated in 1987 as Tata Timken Ltd., a JV between Tata Iron and Steel Company (TISCO) and The Timken Company. Timken acquired Tata Steel’s stake in 1999 and currently holds 75% stake in the company. Timken India mostly manufactures tapered roller bearings and sources other bearings from other plants of the parent company. Besides bearings, the company offers a growing mechanical power transmission product portfolio designed to improve the reliability and efficiency of industrial equipment and machinery. The company's growing product and services portfolio features many strong industrial brands including Timken, Fafnir, Philadelphia Gear, Drives, Lovejoy and Interlube.


Investment Rationale:


- Acquisition of ABC Bearing to bolster position/market share in tapered roller bearing and provide synergy benefits


- Capacity expansion at Jamshedpur plant complete; could drive organic growth


- Sharp rise in North American Class 8 truck sales to boost exports


- Domestic demand growth drivers – renewable, off-highway, DFC, railways


- Traction in service business to support revenue growth and margins as well


Concerns:


- Raw material price volatility


- Slowdown in global markets/domestic economic slowdown


- High competition from peer companies


- Related company transactions


View and Valuation


Timken India is among the leading manufacturers of tapered roller bearings in India. The acquisition of ABC Bearings has further strengthened its position in tapered roller bearings market and provided an entry into wheel-end bearing segment which is estimated to be Rs 400 cr market. Post-acquisition, ABC will get access to Timken’s manufacturing technology and design which could enhance productivity, improve product quality and lead to better pricing of ABC’s products. Timken would also be able to optimize its capacity utilization as ABC’s capacity is underutilized.


Higher procurement of LHB coaches by Railways where cost of bearings used is 2.5-3x, new wagon procurements for DFC, pick-up in segments like renewable, CVs & off-highway and demand from newer segments like Indian Navy are strong growth drivers. These will be met from the new capacities that are coming on stream post recent capex. TIL with a strong export market is likely to benefit from the expected increase in heavy truck sales in the North American market.


At CMP of Rs 860 the stock quotes at 35.1x FY20E EPS. We feel investors could buy the stock at the CMP and add on dips to Rs 763-783 band (31.5x FY20E EPS) for sequential targets of Rs. 982 (40x FY20E EPS) and Rs 1054 (43xFY19E EPS) in 4 6p quarters. We have however not considered the merged financials for the purpose of this report.


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Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor IndiaNotes.com accept any liability whatsoever arising from the use of any of the above contents.




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