FY19-21e EPS cut 12-14%; valuation high; ‘Sell’ retained with revised TP of Rs 570.
Timken held an analyst call to give an update on business growth drivers. Key takeaways are: (i) strong growth prospects in exports due to robust demand for railways and CV bearings in developed markets,
(ii) only modest growth in domestic railways (8-10%); no momentum in demand for Class K bearings yet and (iii) higher commodity prices a headwind for margins although the company has taken some price increases across segments. We find valuations expensive at 25X FY2020e EPS and prefer to play the growth story in bearing industry through Schaeffler and SKF India. Sell stays; TP revised to Rs 570 from Rs 650.
Cut FY19-21e estimates by 12-14%: We have cut our FY19-21e EPS estimates by 12-14% to factor in (i) slower-than-expected ramp-up in demand for railway bearings and (ii) margin pressures, particularly in railways segment, due to an increase in commodity prices. We have incorporated the acquisition of ABC Bearings into our estimates, which leads to 6-8% increase in our FY2019-21e revenue estimates and only 2-4% cut in our net profit estimates (despite steeper cuts in earnings of the erstwhile Timken business). Although the stock has corrected by around 30% in CY2018, valuations are still expensive (our estimates are not conservative as we build in 28% EPS CAGR over FY2018-20e), which drive our Sell rating on the stock.