Stock corner: Retain ‘sell’ on Timken India at revised fair value of Rs 620

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Published: June 5, 2019 2:04:46 AM

While the company’s growth prospects remain strong due to pickup in industry demand and increase in localisation, we believe that profitability is not sustainable at 4QFY19 levels. Valuations are expensive at 25X FY2021E EPS; retain sell with a revised fair value of `620 (from `550).

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Timken India reported 4QFY19 Ebitda of `1 bn (up 120% y-o-y), which was 46% above our estimates, led by stronger revenue growth and higher-than-expected Ebitda margin. Revenue growth was driven by strong growth in industrial segments as well as pickup in railways (volatile on a quarterly basis) and market share gains in the mobility segment.

While the company’s growth prospects remain strong due to pickup in industry demand and increase in localisation, we believe that profitability is not sustainable at 4QFY19 levels. Valuations are expensive at 25X FY2021E EPS; retain sell with a revised fair value of `620 (from `550).

Ebitda was 46% above our estimates due to stronger-than-expected revenue (+30% y-o-y vs estimate of 25% y-o-y) and better-than-expected Ebitda margin (22.6% vs estimate of 16.2%). Revenues increased by 30% y-o-y (KIE: 25%) led by (1) strong growth in railway and mobility segments; (2) acquisition of ABC Bearings (merged from May 1, 2018); and (3) strong growth in industrial segments led by revival in the wind energy segment.

Ebitda margin came in at 22.6% (+930 bps y-o-y and 820 bps q-o-q), which was significantly ahead of our estimate of 16.2%. This was possibly driven by (1) price increases from certain customers pertaining to previous quarters as well; (2) a better product mix; (3) the temporary benefit of decline in commodity prices in certain segments such as railways (normally fixed-price orders); and (4) tapering-off of expenses related to the M&A of ABC Bearings.

We note that the margins of the company tend to be very volatile on a q-o-q basis and thus, the same should not be extrapolated. The company reported net profit of `572 mn (141% y-o-y), which was 67% above our estimates due to outperformance at the Ebitda level.

We expect revenues to grow at 15% CAGR over FY2019-22E led by (1) 21% CAGR in ABC Bearings revenues; (2) strong growth in the railway segment, led by ramp-up in demand from the dedicated freight corridor and a strong order book; (3) sustained recovery in industrial segments; and (4) market share gains in the MHCV segment helped by new product introductions. We expect Ebitda margin to remain steady at 17% over the next three years as we believe Ebitda margin of 4QFY19 is not sustainable.

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