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Date: 2015-04-20

Buy Timken India; target of Rs 740: ICICIdirect

Timken India (Timken) is the leading tapered roller bearings manufacturer with an overall market share of ~8% in the Indian bearings market. The company is a leader in freight segment bearings in India with ~50% market share. Further, it has a huge opportunity emanating from the DFC and increasing number of Metro Railways across cities. Furthermore, it is also looking to expand its repairs and services portfolio over the next three to five years wherein we estimate an opportunity of Rs 2500 crore. Going ahead, we expect handsome topline growth of 19.7% CAGR in FY14-17E and strong earning CAGR of ~44% during the same period led by margins expansion (16.5% in FY17E vs. 9.9% in FY14). Given the leadership in the tapered bearings led by strong parentage, robust balance sheet and strong earning CAGR (~46% over FY14-17E), we initiate coverage with a BUY recommendation on the stock.

Timken India’s strong export revenue growth enabled it to combat the muted domestic business. Exports comprised 26% of FY14 revenues vs. 12% in CY09. The company logged ~32% CAGR in FY09-14 from Rs 78.9 crore to Rs 237.9 crore. Going ahead, Timken India is expected to be a key hub for export to various customers of Timken entities. Hence, we expect export revenues to grow at ~24% CAGR in FY14-17E to Rs 452 crore.

Backed by the know-how of Philadelphia Gears (acquired by the parent in 2011), Timken India has set up a gear box repair facility in Raipur to serve the heavy process industry. Currently served by unorganised players, the management pegs the opportunity in the segment at ~Rs 2500 crore in India wherein it is looking to garner up to 15% market share over the longer term. We expect repairs and services revenues to zoom to Rs 137 crore in FY17E (~11% of net sales) vs. meagre Rs 24 crore in FY14. Furthermore, the DFC would also provide an incremental bearing market opportunity of ~Rs 500 crore led by incremental ordering of new wagons.

"Timken is trading at premium valuations of 32.2x FY17E earnings, given its superior revenues growth led by exports, the huge opportunity and growth prospects in the railways segment and repairs business, which it caters to. Given the leadership in tapered bearings led by strong parentage, robust balance sheet and strong earnings CAGR (~46% over FY14-17E), we ascribe 0.8x PEG (implying a P/E of 36.5x) with a target price of Rs 740/share. We initiate coverage on the stock with a BUY rating", says ICICIdirect.com research report.


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