Growth triggers to keep earnings trajectory robust for Timken India

New plant expected to boost company's revenues, margins

Bearings maker Timken India has been one of the big out-performers in the market during the last one year with returns of 78 per cent.

In comparison, the BSE 500 gained about 9 per cent while the benchmark Sensex was up 10 per cent over the same period.

A significant chunk of the gains came in the past month when the stock surged 30 per cent.

The recent gains are on the back of multiple triggers. These include plans by the company to set up a plant to make spherical and cylindrical roller bearings (SRB & CRB) in the country.

The Rs 600-crore import substitution project is expected to help expand the addressable market and improve its profitability. This will enable it to tap the SRB and CRB market pegged at Rs 3,700 crore.

The company — through group entities — is importing them and margins are low, given the trading nature of the business.

Swarnim Maheshwari and Sushil Dhoot of Nuvama Research highlight that the move imparts significant long-term visibility beyond FY25 with the potential to double its existing revenues.

Considering an asset turnover of 3-4 times, the investment could generate about Rs 1,800-2,400 crore of revenues beyond FY25. This would be about 80 per cent of estimated FY23 revenues.

The plant is expected to be margin accretive and could provide a 200-300 basis points (bps) margin expansion over the next few years from the current 18-19 per cent.

The low-margin traded goods accounted for 25-30 per cent of the revenue mix. Traded goods have a 600-800 bps lower margin compared to profitability from manufacturing it.

The move indicates strong support from parent and robust demand conditions, said Nomura Research, which has a buy rating with a target price of Rs 3,750 a share.

In addition to the current application for SRB and CRB in mining, paper pulp and wind, JM Financial believes that the continued shift of production lines by the parent company could open up new verticals. These could be in defence and aerospace, food and beverages and medical equipment exports.

The other areas highlighted by the brokerage’s Sandeep Tulsiyan and Gaurav Uttrani are cyclical uptick in the commercial vehicles segment.

This comes as the sector gathers further volume momentum and tenders for railway wagons.

The medium and heavy commercial vehicles segment saw a robust growth of 75 per cent year-on-year (YoY) during the first half of the current financial year. From the current monthly sales of 28,000 units, ordering levels are expected to move up to the earlier peak of 40,000 units.

After a 60 per cent growth in wagon production in the first half of FY23, the wagon ordering activity is expected to gather pace.

JM Financial expects Timken to garner a lion’s share of 90,000 wagon tenders by Indian Railways with additional volumes on account of dedicated freight corridors and high-speed rail rolling stock.

Exports, which account for a third of its sales, saw strong growth in the first half and could decelerate, given the slowing exports to key markets such as Europe.   

JM Financial, which expects the company to deliver earnings growth of 24 per cent over FY22-25, has a target price of Rs 3,700 a share.

The stock — at the current price of Rs 3,497 — is trading at 51 times its FY24 earnings estimates.

Given the price run-up and premium valuations as compared to peers SKF India and Schaeffler India, investors should await better entry points before considering the stock.