Timken India reported disappointing 3QFY18 results with 13% y-o-y EBITDA decline (on a low base), which was significantly below our estimates. As per the management, both revenue growth and profitability were impacted by one-offs, which will likely normalise over the next 1-2 quarters. While 3QFY18 results were impacted by one-offs, we note that even after assuming normalised 4QFY18 results, the company’s FY2016-18E PAT would grow at just 2.5% CAGR, which is disappointing. Valuations are expensive at 30X FY2020E EPS; reiterate SELL with a revised TP of Rs 660 from Rs 680.
Timken reported 3QFY18 EBITDA of Rs 207 million (down 13% y-o-y), which was 64% below our estimates due to (1) lower-than-expected revenue growth and (2) 700 bps sequential deterioration in gross margin. Revenues increased by 21% y-o-y to Rs 2.8 billion (15% below estimates); however, the growth came off a low base as the company took two-week plant shutdown in 3QFY17 (revenues down 9% y-o-y) to align manufacturing facility ahead of the commissioning of new capacity. EBITDA margin came in at 7.4% (down 290 bps y-o-y and 990 bps q-o-q), which was significantly below our estimates. The miss in EBITDA margin was driven by (1) lower-than- expected gross margin and (2) negative operating leverage. The company reported PAT of Rs 92 million (down 31% y-o-y), which was 72% below our estimates.
As per the management, this quarter was marked by certain one-offs (not quantified) – (1) lower exports of large-sized bearings in both mobility and railway segments, (2) weaker product mix in the mobility segment, (3) increase in steel prices and the need to import steel from Japan leading to higher RM costs (customers have given price increase from January 2018) and (4) higher employee costs due to payment of performance bonus to employees. While these can be considered as one-offs from quarterly perspective, we believe that (1) some of these items (such as bonus to employees) are recurring items on an annual basis and (2) the effect of negatives in this quarter such as weaker product mix tends to get normalized over quarters. We would like to highlight that even after assuming normalized 4QFY18 results, the company’s FY2016-18E PAT would grow at just 2.5% CAGR, which is disappointing.