April 9, 2015 Timken India (TATTIM) - ICICI Directcontent.icicidirect.com/mailimages/IDirect_TimkenIndia_IC.pdf · also looking to expand its repairs and services portfolio over the

April 9, 2015

Initiating Coverage

ICICI Securities Ltd | Retail Equity Research

Opportunities galore!!! 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 | 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. Strong exports –boost during tough domestic demand scenario 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 | 78.9 crore to | 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 | 452 crore. Huge opportunity in services & railway segment… 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 ~| 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 | 137 crore in FY17E (~11% of net sales) vs. meagre | 24 crore in FY14. Furthermore, the DFC would also provide an incremental bearing market opportunity of ~| 500 crore led by incremental ordering of new wagons. Premium valuations driven by growth prospects ahead… 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 | 740/share. We initiate coverage on the stock with a BUY rating.

Exhibit 1: Valuation Metrics | crore FY13 FY14 FY15E FY16E FY17ENet Sales (| crore) 688.5 720.1 918.1 1,058.7 1,236.4 EBITDA (| crore) 73.5 71.6 129.1 163.9 204.4 Net Profit (| crore) 44.2 44.8 82.6 106.4 137.9 EPS (|) 6.5 6.6 12.1 15.6 20.3 P/E (x) 97.7 96.6 52.3 40.7 31.4 Price / Book (x) 12.7 11.3 10.2 8.8 7.3 EV/EBITDA (x) 58.7 60.2 33.4 26.2 21.4 RoCE (%) 17.4 14.5 25.8 29.1 27.2 RoE (%) 13.0 11.7 19.4 21.6 23.4

Source: Company, ICICIdirect.com Research

Timken India (TATTIM)| 653

Rating Matrix Rating : BuyTarget : | 740Target Period : 12 monthsPotential Upside : 13%

YoY growth (%) (YoY Growth) FY14 FY15E FY16E FY17ENet Sales 4.6 27.5 15.3 16.8 EBITDA (2.6) 80.4 27.0 24.8 Net Profit 1.2 84.6 28.8 29.6 EPS (Rs) 1.2 84.6 28.8 29.6

Current & target multiple (x) FY14 FY15E FY16E FY17EP/E 99.2 53.7 41.7 32.2 Target P/E 112.5 60.9 47.3 36.5 EV / EBITDA 61.8 34.3 26.9 22.0 P/BV 11.6 10.4 9.0 7.5 RoNW (%) 11.7 19.4 21.6 23.4 RoCE (%) 14.5 25.8 29.1 27.2

Stock Data

Bloomberg/Reuters Code TMKN:IN / TIMK.NSSensex 28,250 Average volumes 76,920 Market Cap (| crore) 4,439.6 52 week H/L 620/ 183Equity Capital (Rs crore) 68.0 Promoter's Stake (%) 75.0 FII Holding (%) 0.9 DII Holding (%) 9.9

Comparative return matrix (%) 1M 3M 6M 12M

Timken India 12.9 18.9 46.5 234.3 FAG Bearing 4.5 16.5 43.9 122.0 NRB Bearing (6.8) 0.7 1.0 155.2 SKF India (1.1) 4.5 28.1 74.1

Price movement

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Research Analysts

Chirag J Shah [email protected]

Bhupendra Tiwary [email protected]

Page 2ICICI Securities Ltd | Retail Equity Research

Company background Incorporated in 1987, Timken India is the Indian subsidiary of the US based Timken Group, which is a global leader in tapered roller bearings. Timken India is the fourth largest company in the Indian bearing market with ~8% revenue market share. It commands ~40% share in tapered roller bearings (which form ~62% of the topline) in India. It is well diversified across segments catering mainly to mobile (40-45% of revenues excluding exports) and process industries (25% of revenues). In the mobile segment, Timken India caters to OEMs and end users in industries like CVs and off highways (20-25% of revenue) and Railways (20-25% of revenue). In the process industries, they cater to heavy industries, industrial processes, gear devices, energy and industry distribution. Exports (33% of revenues) are made to Timken’s parent company (mainly tapered roller bearings). In terms of clientele base, the major clients of Timken India are Bhel, Titagarh Wagons, Tata Steel, Spicer India, JSW Ispat Steel, Indian Railways, Escorts Ltd, HAL, etc. Timken India has two facilities:

• Jamshedpur: Established in 1987, it produces standard roller, special roller, rail road bearings and double extended cones for mobile segment and process industries

• Raipur: Established recently in 2013, it is a gear and bearing industry service centre with expertise garnered from the acquisition of Philadelphia Gear. Established at a cost of | 13.5 crore, the facility aims to cater to combined gear and bearing services

Exhibit 2: Timken India – Timeline of company milestone

Incorporated as Tata Timken Ltd

1987

Commenced commercial production at its Jamshedpur plant

1992

Established technology centre at Bangalore (100% Timken owned)

1998Acquired 40% stake from Tata Steel

1999

• Company name changed to Timken India Ltd

1999

Manufacturing facility at Chennai (100% Timken owned)

2008Accounting year changed from CY to FY

2012

Raised | 51.19 crore through QIP

Industrial service center in Raipur

2013


Shareholding pattern (Q3FY14)

Shareholder Holding (%)Promoters 75.0

Institutional investors 10.8General public 14.2

FII & DII holding trend (%)

6.1 6.45.7

0.9

3.8

5.5 5.3

9.9

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Q4FY14 Q1FY15 Q2FY15 Q3FY15

(%)

FII DII


Exhibit 3: Timken product portfolio, market segment and their application Market Segment Application Product Portfolio

Taper roller bearings

Lubricants


Housings

Seals

Lubricants


Spherical roller bearings



Cylindrical roller bearings

Lubricants

SealsCondition monitoring equipment and other accessories*




Spherical & cylindrical roller bearings

Pulp and paper industries, food & beverages industriesChippers/debarkers, forming/press dryer, calendar, material handling, peelers/dicers, sorting equipment, drives Taper roller bearings

Trucks and buses

Freight and passenger rails

Axles, transmissions

Wheel-ends and engines, locomotives, passenger coaches and wagons

Axles, transmissions

Casters, flat products and long products, Shovels, draglines, haul trucks, loaders, crushing, screening and material handling, vertical rolling mills

Off-highway equipment, agricultural tractors

Metals industries, mines, cement plants

Power generation plants, wind mills, oil & gas plants

Gear drives

Pulveriser, bowl mills, pumps & material handling, main shaft and gear boxes, top drives, mud pumps, crown/ travelling blocks, rotary tables and compressors

Industrial & planetary gear boxes, geared motors and fans


Exhibit 4: Timken India – Domestic and export segment view

Domestic Exports

Revenues | 482.1 crore | 237.9 crore

Products Tapered, cylindrical, thrust bearings

Tapered roller bearings

Clientele Bhel, Titagarh Wagons, Tata Steel, Spicer India, JSW Ispat Steel,Indian Railways, Escorts

Timken(Parent)

Growth drivers Commercial vehicle sales, Railways

Global bearings growth in mobility sector

Share of total revenue 67% 33%

Segments served Railways, mobile & process industries, steel, aerospace

Railways, Automotive, Off-highway



Exhibit 5: Timken in India


Exhibit 6: Traded goods form ~31% of topline

Traded Goods31%

Manufactured Goods69%


Exhibit 7: Segmental exposure of Timken India

Exports33%

Railways22%

Industrial & aftermarkets

25%

CV's, Off Highways OEM

20%


(Large industrial bearings for exports)


Investment Rationale Strong parentage – among leaders in global bearings markets

Timken Company – Global pioneer in tapered bearings

Established in 1899, headquartered in North Canton, The Timken Company is a leading global supplier of bearings, power transmission and related services. Earlier, a key player in steel, aerospace, bearings and power transmission, it spun off its steel business into a separate company and restructured its aerospace business in 2014 to focus on the bearings & power transmission business. With more than a century of experience, Timken is spread across 28 countries with 62 manufacturing facilities.

Timken is the world leader and pioneer in tapered roller bearing. It is globally the sixth largest bearing manufacturing company with a turnover of US$3.1 billion in FY14. Timken commands a global market share of ~19% in the tapered roller bearing market (~$10 billion market). In the past decade, the company has changed its product offerings with increased importance to non bearing products and services.

In terms of segmental bifurcation, the mobile industry contributes 55% and the rest comes from process industries. Geographically, North America, constitutes a lion’s share of revenues at 57% while EMEA, Asia Pacific, Latin America form 18%, 17%, 8% of the topline, respectively.

Post the spin-off of the steel business and restructuring of the aerospace and defence segment, Timken Company has segmented its business into two areas viz. Mobile industries: This segment consists of five business units that offer and deliver a full range of products, solutions and services to both OEMs and aftermarket customers. The business units are: heavy truck (14%), light vehicle (25%), off-highway (24%), rail (20%) and aerospace/defence (17%). Their sales amounted to US$1.7 billion (55% of revenues).

Process industries: This segment consists of six business units that offer and deliver a full range of products, solutions and services to both OEMs as well as aftermarket customers. The business units are: agriculture, energy, metals, mining, construction and industrial services. Their sales amounted to US$1.4 billion (45% of revenues). Exhibit 8: Net sales (2014) by customer industries

3%

4%4%

5%

5%

5%

6%

8%

7%7%

11%15%

19%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%

Industrial Machinery

Rail

Energy

Agriculture

Metals

Civil Aerospace

Other



Recently acquired business may provide new avenues

Timken Company has been actively acquiring companies to add to its product & services offerings. In the last four years, the company has acquired nine companies/businesses with a combined sales potential of ~US$300 million. According to the management, the parent brings in some of these new product/services in India if their demand and cost matrix is favourable. It is noteworthy that the industrial gears drives business in Raipur was set up using the expertise from the acquisition of Philadelphia Gear. We believe these acquired businesses, once implemented in India, may provide a huge opportunity to cater to new product/service lines.

Exhibit 9: Timken Company acquisitions in last four years


Strong technology support backed by parent flows into Indian business…

Timken has been a pioneer in bearing innovation and has come out with new products ranging from the introduction of tapered roller bearings to AP bearings used in railways. The company has four captive technology centres including the one at Bengaluru that develops and delivers innovative friction management and mechanical power transmission solutions & technical services. Timken India uses application engineering, manufacturing advancement and material/ metallurgical support from the Bengaluru technology centre. This helps in manufacturing processes including, raw material testing, analytical research, reverse engineering and product validation & reliability studies.

At the parent level, R&D expenditure stood at ~US$45 million in CY14 (1.5% of sales). This has grown from ~US$39 million in CY12 (1.1% of sales).

Sales: $85M Industrial gear drives & repair services

Sales: $100M Chains and augers

Sales: $9M Split roller housed units and precision products

Sales: $18M Electric motor repair and related services

Sales: $31M Industrial gear drives and repair services

Sales: $17M Electric motor repair and related services

Sales: $13M Lubrication delivery systems and related components

Sales: $30M Electric motor repair, related services & uptower wind maintenance

2014

Sales: $14M Spherical roller bearing steel housed unit & couplings

38.5 38.9

44.9

34

36

38

40

42

44

46

CY12 CY13 CY14

(USD

mn)

0.8

1.2

1.6

(%)

Expenditure

R&D as a %age of sales (RHS)


Serving Railways and CV bearing needs

Railways

Leader in Railways freight segment & locomotive bearings

Timken India is the leading supplier of railway bearings with a presence in specialised segments like locomotive, freight, fast trains & metro. The Railway segment forms ~22% of sales of Timken currently. Its supplies to Indian Railways stood at ~16%of the topline in 9MFY13, clearly reflecting the importance of railways in Timken’s clientele.

The overall Railway bearings demand is pegged at ~| 800-1000 crore. Segment wise, it can be classified into passenger, locomotive & freight. The non-freight segment (passenger & locomotive) bearings form ~40% of Railways demand while freight segment demand forms ~60% of Railways bearings. The passenger segment can be further subdivided into normal passenger train, super fast trains (Rajdhani, Shatabdi, etc.) and Metro train. Timken is present in the specialised segments i.e., locomotive (still a niche segment in India), freight (commands ~50% share), fast trains and metro (another niche segment from an Indian perspective). As per the management, 70% of the existing wagons need to be replaced. Therefore, larger opportunities in this segment would flow through once new wagon ordering gains momentum.

Exhibit 10: Railway bearings business in India

Passenger Locomotive Freight

Normal coaches High speed fast trains

Metro

Spherical bearings

Motor, gearbox,

cylindrical roller and

tapered roller bearings

Tapered roller, cylindrical

roller and axle bearing

Cylindrical roller, ball, journal, suspension, generator, gearbox bearings

Spherical, tapered roller

bearings

Fag, SKF, NEI SKF, Timken, Fag Timken, NEI SKF, Timken, NEI NEI, Timken

Railway Bearings

Bearings Used

Major



Exhibit 11: Timken India’s sales to Indian Railways

79.367.5

136.3

82.9

0.020.040.060.080.0

100.0120.0140.0160.0

CY09 CY10 FY12 M9FY13

(| c

rore

)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

(%)

Sale to Indian Railway (as a%age of total sales)

Source: QIP RHP, ICICIdirect.com Research * FY12 numbers corresponds to 15 months ending March, 2012

DFC – a new opportunity

Dedicated freight corridor (DFC) is a huge area of opportunity for railway bearings demand as wagons to be used, in dedicated freight corridors, are expected to need high load-bearing applications where Timken has the leadership position.

Given the leadership position and technological expertise on the railways bearings side, Timken is also the technology partner and is currently working on the selection of bearings as also vying for major suppliers for the same. In value terms, the company has indicated that given the upgradation due to high overhaul requirement, the existing bearing value would go up ~5%.

In terms of new demand, SKF India, the largest bearing manufacturer in India, has indicated that DFC would provide an incremental bearing market opportunity of ~| 500 crore led by the requirement of ~30,000 wagons of new designs.

Exhibit 12: DFC to provide additional bearings demand of ~| 500 crore

DFCTotal Cost: ~| 81000 cr

Total length : 3338 km

Eastern CorridorTotal Cost: ~| 30000 cr

Total length: 1839 km

30000 new wagons of new design

Western CorridorTotal Cost: ~| 51000 cr

Total length : 1499 km


DFC would provide an incremental bearing market opportunity of ~| 500 crore led by the requirement of ~30,000 wagons of new designs.


Metro rail & fast trains to gain ground, going ahead

Timken is also present in specialised segments such as fast trains and metro railways, which are niche currently from the Indian perspective.

While currently very few metro projects (refer the exhibit) are operational, there is a healthy pipeline of under construction projects that are expected to become operational in the next three or four years. Furthermore, various cities across India have also proposed and approved the construction of metro projects that are expected to be constructed in the next six to eight years. We believe that as these projects become operational, they would provide a huge opportunity for Timken’s bearing demand for metro coaches.

Exhibit 13: Metro projects in India – operational, under construction & planned

Kolkata MetroDelhi Metro

Namma Metro (Bengaluru)Gurgaon Metro

Mumbai Metro (Phase I)

Jaipur MetroChennai Metro

Hyderabad MetroNavi Mumbai Metro

Kochi MetroLucknow Metro

Ahmedabad Metro

Nagpur MetroBhopal Metro

Bhubaneswar MetroChandigarh Metro

Indore MetroKanpur MetroNasik MetroPatna Metro

Mumbai Metro expansion

Operational Under Construction Planned

Source: Media reports, ICICIdirect.com Research

Timken is the only company in India that produces these semi high speed passenger train bearings and is a market leader with Indian railways in that application. Currently, the company provides bearings for Shatabdi and Rajdhani trains. According to Railway Budget 2015, speeds in nine railway corridors would be increased to 160-200 km per hour from 110-130 km per hour now. We believe the implementation of the same would lead to incremental demand for railway coaches wherein Timken has a leadership position in bearings.

Exhibit 14: Corridors approved for increase in speed Delhi - Agra Mumbai - GoaChennai -Hyderabad Mysore - Bangalore -ChennaiDelhi - Chandigarh Nagpur -Raipur -BilaspurDelhi - Kanpur Nagpur -SecunderabadMumbai -Ahmedabad



CV industry – on the cusp of recovery

The domestic CV industry is recovering from one of the longest down cycles in recent times. The CV industry has been facing challenges on two counts, viz. slowing demand as industrial activity levels & infrastructure investments have declined in the past two or three years and increasing competition leading to escalating discounts.

Timken India’s revenue contribution from CV and off highways segment is ~20-25% of the topline through bearings supply for trucks and tractors. While overall tractors sales volumes have been healthy at ~12% CAGR in FY10-14, the CV industry is undergoing one of its most challenging times.

However, amid challenging times, recently there has been an uptick in M&HCV volumes driven mainly by growth in the southern markets where opening up of the mining sector combined with attractive discounts and excise duty cuts (now expired) have enticed fleet operators to replenish their ageing fleet.

Going ahead, we believe the CV industry, especially the M&HCV segment, is likely to witness a strong multiplier effect (volume growth of ~22-23% in FY16E and FY17E) with the pick-up in industrial activity and infrastructure sector spending over the next two or three years. Already, policy actions like reversal of mining bans, ongoing auction of mines and resumption of stalled infra projects have led the way for strong growth, going ahead. Tractor volumes, however, are likely to post only modest growth as erratic monsoons have tempered rural sentiments while the new government is less likely to continue the policy of the last government of providing a boost to the rural region.

Exhibit 15: CV volumes at nadir

32.2

6.1

-22.1

35.131.2

19.0

-3.2

-18.7

-9.0

23.0 22.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

(%)


Exhibit 16: Initial signs of recovery in M&HCV segment

14000

18000

22000

26000

30000

Apr-1

4

May

-14

Jun-

14

Jul-1

4

Aug-

14

Sep-

14

Oct-1

4

Nov

-14

Dec-

14

Jan-

15

Feb-

15

(%)



Huge opportunity in services & repairs business

Timken’s services business includes bearing reconditioning and repair, condition monitoring and reliability services for industrial and railway customers that involves inspection of bearings and, if required, replacing non-usable components. The company also provides maintenance and refurbishment services to large industrial equipment used in the metal and energy sectors. Apart from that, it also provides on-site services of rolling mill maintenance of steel plants and gear box maintenance services (through the plant at Raipur). Services revenues formed meagre 3.3% of revenues in FY14.

Exhibit 17: Timken India’s services business


Exhibit 18: Timken’s role in services critical to its customer’s business


Rolling shop maintenance – “MILLTEC” services…

‘MILLTEC’ services business entails on-site maintenance and servicing of steel mills. Timken undertakes assembling, disassembling, maintenance, repair, overhauling and other related activities in steel rolling mills. The company is currently operating out of the facilities of Tata Steel, JSW Steel and Essar Steel for maintaining its roll bearings and steel mill rolls. As per the management, right now this service is being undertaken by steel manufacturers themselves. However, going ahead, in the long run, the scope of such services by third parties would improve as steel companies move towards focusing on core activities.


Gearbox repair business –huge potential…

In order to expand its services portfolio, Timken has established a greenfield operation centre in Raipur, Chhattisgarh for repair of gearboxes. The facility is backed by the technical know-how of Philadelphia Gears (acquired by parent in 2011). It is a dedicated service centre with advanced inspection techniques and machine tools to serve the heavy process industry segment covering metals (steel & aluminium), cement, power generation and mining industries. The facility has been set up with a total capex of ~US$5 million and started operations in FY15.

While it is not served by any organised players now, the management pegs the opportunity at ~| 2500 crore in India. Therefore, Timken India has a vision to set up six such facilities at various industrial zones in the long run with an aggregate sales opportunity of ~| 600 crore.

Services business to zoom to ~11% of topline by FY17E vs. ~3% in FY14

The repairs and services revenues, at | 24 crore, formed a meagre 3.3% of revenues in FY14. Going ahead, with the commissioning of the Raipur plant, repairs and services revenues are expected to zoom to | 137 crore in FY17E (~11.2% of net sales).

Exhibit 19: Repairs & services revenues to grow 6x as Raipur plant ramps up

13.0 12.924.8 24.2 24.0

79.0

114.0136.8

020406080

100120140

CY09 CY10 FY12 FY13 FY14 FY15E FY16E FY17E

(| c

rore

)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

(%)

Repairs & services Income As a %age of Net Sales (RHS)


Strong exports a cushion in challenging domestic market

Timken India’s strong export revenues growth has enabled it to combat the muted domestic business. The company exports taper roller bearings to cater to the Timken entities’ international customers in diverse industries like railways, automotive and off-highway equipment. Exports constituted 26% of Timken’s FY14 revenues vs. 12% in CY09. It logged ~32% CAGR during FY09-14 from | 78.9 crore to | 237.9 crore.

Going ahead, Timken India is expected to be a key hub for export to various customers of Timken entities. Therefore, we expect export revenues to grow at ~24% CAGR over FY14-17E to | 452 crore.

Going ahead, with the commissioning of the Raipur plant, repairs and services revenues are expected to zoom to | 137 crore in FY17E (~11.2% of net sales).

We expect export revenues to grow at ~24% CAGR over FY14-17E to | 452 crore

Exhibit 20: Strong exports show cushions domestic slowdown

78.9143.91

205.35 180.4237.9

314.1376.9

452.2

0

100

200

300

400

500


| cr

ore

-20

0

20

40

60

80

100

(%)

Exports YoY (RHS)



Capacity expansion expected in FY17E once domestic demand picks up

Timken currently operates at ~80-85% capacity at its Jamshedpur plant. While expansion is a logical decision, the company is cautious in its capex plans and has indicated that greenfield expansion would be considered only once a sharp recovery is seen in domestic demand. The components of traded goods have gone up (from ~5% in CY10 to ~32% in FY14) owing to its preference towards sourcing from parents till the critical mass demand in India is significant.

We believe the company would go for a capacity expansion sometime in FY17. As indicated, it is expected to spend ~| 180-200 crore on incremental capacity, which is expected to be funded partially by internal accruals and partly through debt of ~| 80 crore. The capacity, however, would be operational from FY18 onwards as it would take about nine to 12 months to be completed.

Exhibit 21: Trading components go up given incremental demand served by parent

17.8 21.7

117.8165.7

233.2

314.8362.0

416.3

0

90

180

270

360

450


(| c

rore

)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

(%)

Traded Goods % of Net Sales (RHS)

Source: Company, ICICIdirect.com Research FY12 numbers corresponds to 15 months ending March, 2012

Exhibit 22: Fixed asset turn at historical high given higher trading share

Fixed Asset Turnover

1.6

2.2

3.4

2.7 2.62.8 2.9

3.2

0.00.51.01.52.02.53.03.54.0

CY09 CY10 FY12* FY13 FY14 FY15E FY16E FY17E

(x)

Source: Company, ICICIdirect.com Research *FY12 numbers corresponds to 15 months ending March, 2012

Exhibit 23: Adjusted fixed asset turnover

Adjusted Fixed Asset Turnover

1.4

2.0

2.8

2.01.6 1.6 1.6 1.7

0.0

0.5

1.0

1.5

2.0

2.5

3.0

CY09 CY10 FY12* FY13 FY14 FY15E FY16E FY17E

(x)

Source: Company, ICICIdirect.com Research * FY12 numbers corresponds to 15 months ending March, 2012

The capacity, however, would be operational from FY18

onwards as it would take about nine to 12 months to be

completed.


Timken vs. peers

Technology at par with key competitors

Given the strong role of technological expertise, especially for OEMs’ bearings demand, most dominant names in the organised segment have a product/R&D back-up either with their parent (SKF, Fag and Timken) or a collaboration with a foreign partner (NEI, ABC), which ensures technological support.

Timken’s parent has four captive technology centres including the one at Bengaluru, which develops and delivers innovative friction management and mechanical power transmission solutions and technical services.

We highlight that given the technology intensive nature of the industry, especially in terms of precision and advanced bearings, the current structure of the industry ensures that existing top players would continue to lead the sector.

Exhibit 24: Indian bearing sector, foreign technological partners Indian player Technological partner/parent

SKF India SKF AB, Sweden

Fag Bearings Schaeffler Group, US

Timken India The Timken Company, US

NEI NTN Japan

NRB Bearing Nadella (erstwhile partner)

INA Bearings Schaeffler Group, US


Timken - leader in tapered roller bearings segment

Each bearing manufacturer specialises in a particular area based on their key competence, which forms the major portion of revenues.

While SKF is a strong player in the ball bearing segment (with ~45% market share), Fag is a leader in the roller bearing segment (cylindrical and spherical, with 45% share) NRB is a key player in needle roller bearings (70% market share) through competence acquired from Nadella and INA (acquisition of SNL Bearings).

Timken is a leader in the tapered roller bearings segment (~40% market share). The competitor for Timken in tapered bearings segment is NEI and Fag.

Exhibit 25: NRB leader in needle roller bearings Players Key competence Market share Closest Competitor Application

SKF India Deep Grove Ball Bearings 45% FAG Used in wheel axles, transmission, pumps, gear boxes, fans etc

FAG Bearings Roller Bearings 45% (Spherical & Cylindrical) SKF Car suspension, drive shaft, heavy machinery, machine tools etc

NRB Bearings Needle Roller Bearing 70% INA Bearings Niche application in engine, gearbox.with less load and thrust.

Timken India Tapered Roller Bearings 40% FAG, NEI Wide usage in commercial vehicles, off highways and Railways



One of the highest asset turnovers in industry

Timken enjoys the highest asset turnover in the industry. This is partly due to the component of traded goods and partly due to its focus on manufacturing only tapered roller bearings in India. While the fixed asset turnover at the gross level is 2.6x, the adjusted asset turnover (only for manufactured goods) at 1.6x is higher than asset turn of peers, which is in the range of 1.1-1.3x. This is mainly attributable to Timken’s focus on only tapered roller bearing production in India.

Exhibit 26: Highest asset turn…

2.2

3.4

2.72.6

2.82.4

2.3

1.1 1.1 1.1

2.5

1.9

2.52.8

2.4

1.2

0.5

1.0

1.5

2.0

2.5

3.0

3.5

CY10/FY11 CY11/FY12 CY12/FY13 CY13/FY14

(x)

Timken FAG SKF NRB Bearings


Exhibit 27: Adjusted asset turn comparable to peers

2.0

2.8

2.0

1.61.8

1.6

1.21.1 1.1 1.1

1.61.31.4 1.4

1.21.2

0.5

1.0

1.5

2.0

2.5

3.0


(x)



Exhibit 28: Timken’s traded good segment leads to higher asset turnover

43.2 32.4 32.2

56.8 67.6 67.8

100.0

0.0

20.0

40.0

60.0

80.0

100.0

SKF Timken FAG NRB Bearings

(%)

Traded Manufactured


Working capital comparable to peers…

With a significant proportion of traded goods, lower debtor and inventory levels, Timken’s net working capital at ~30% of sales is comparable to peers. Its working capital, however, is higher than SKF (higher share of traded goods) and Fag but lower than NRB, which has higher inventory levels due to higher exports and larger number of SKUs. Exhibit 29: NRB has higher working capital vis-à-vis its peers

22.027.1 29.9

12.616.8

22.126.0

35.1

44.9

19.0

13.3 13.815.3 17.520.2

40.7

0.0

10.0

20.0

30.0

40.0

50.0


(%)



The higher adjusted asset turnover can be attributed to Timken’s focus on only tapered roller bearing production in India as well as services component in revenues

Its working capital, however, is higher than SKF (higher share of traded goods) and FAG but lower than NRB which has higher inventory levels due to higher exports and large no. of SKU.


Highest proportion of exports among peers…

Timken has the highest proportion of exports among its peers at ~33% of the topline. While SKF exports ~8% of its topline, for Fag exports form ~15.5% of the topline while NRB exports ~23.3% of the topline. As per the management, Timken India would remain an important link to Timken’s global supply chain, especially with respect to railways bearings. It should be noted that export sales have superior margins compared to the domestic business in a stable currency scenario.

Exhibit 30: Highest proportion of exports among peers

30.7

26.2

33.0

12.013.9

8.08.7

23.3

24.7

9.6

15.5

8.08.8

6.3

13.0

21.6

0.0

8.0

16.0

24.0

32.0

40.0


(%)



Margins hit for all key players…

Given muted domestic demand over the last couple of years, all major bearings players have seen a decline in their margins. Timken’s margins have been worst hit with margins coming down to 9.9% in FY14 vs. 17.5% in CY08 as a result of the rupee depreciation impact on imports and increase in proportion of low margin traded goods in overall sales. Going ahead, a better demand outlook would boost utilisation levels and, thus, margin profiles of players.

Exhibit 31: All players experience margin hit in last couple of years

17.6

13.514.9

12.9

10.7 9.9

19.7

11.5

17.1

19.4

15.3

12.912.8

10.2

13.512.2 11.6 11.511.1

15.6

21.520.3

16.9 17.0

4

7

10

13

16

19

22

CY08/FY09 CY09/FY10 CY10/FY11 CY11/FY12 CY12/FY13 CY13/FY14

(%)




Financials Revenues to grow at 19.7% CAGR in FY14-17E

Timken’s revenues grew at 22.7% CAGR in CY09-FY14 led by strong exports, which grew at 31.8% CAGR during the same period.

While export revenues are going to remain strong, domestic revenue growth, going ahead, would hinge on an economic recovery. This, in turn, would boost the industrial and CV segment demand. We build in overall revenue growth of 19.7% in FY14-17E. While exports is expected to grow at a staggering 23.9% CAGR, the domestic sale of goods is expected to grow at 11.6% CAGR with services revenues growing at 79% CAGR on a low base.

We have built in 10% growth in domestic revenues in FY15E and FY16E. It should recover to post ~15% growth in FY17E. The maintenance and refurbishment services revenues are expected to grow 3x in FY15E with the Raipur plant contribution and thereafter at 25% and 15% YoY in FY16E and FY17E, respectively. Exports are expected to continue their strong growth with 32% YoY growth in FY15E and 20% YoY thereafter in FY16E and FY17E.

Exhibit 32: Revenue growth trend

830.8688.5 720.1

918.11,058.7

1,236.4

0

200

400

600

800

1,000

1,200

1,400

FY12 FY13 FY14 FY15E FY16E FY17E

| cr

ore

-10.020.030.040.050.060.070.080.090.0

(%)

Net Sales YoY (RHS)


Exhibit 33: Break-up of revenues into various segment

218 299582

466 443 488 537 61779144

205180 238

314377

452

13

13

2524 24

79114

137

0

200

400

600

800

1000

1200

1400


| cr

ore

Domestic Sales of Goods Exports Maintenance and refurbishment services Other


Exports are expected to continue their strong growth with 32% YoY growth in FY15E and 20% YoY, thereafter, in FY16E and FY17E


EBITDA to grow at 41.9% CAGR in CY13-16E

The EBITDA margins of Timken have come down to 9.9% in FY14 vs. 17.5% in CY08 as a result of the rupee depreciation impact on imports and increase in proportion of low margin traded goods in overall sales.

In the recent past, Timken has localised a considerable portion of its steel requirement as well as stable currency allowing the company to post a margin of 14.9% in 9MFY15.

We expect EBITDA to grow at 41.9% CAGR in FY14-17E led by handsome revenue growth as well as margins. We expect EBITDA margins to recover to 16.5% in FY17E vs. 9.9% in FY14. Exhibit 34: EBITDA growth trend

106.3

73.5 71.6

129.1

163.9

204.4

0

50

100

150

200

250


(| c

rore

)

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

(%)

EBITDA Margin (RHS)


PAT growth of 45.5% CAGR in FY14-17E

Timken’s PAT has exhibited muted growth of 8.3% CAGR in CY09-FY14 despite handsome topline growth, owing to a sharp decline in margins, which had offset topline growth.

Going ahead, PAT is expected to grow at a CAGR of 46% in FY14-17E driven by healthy revenue growth and superior margins. Consequently, PAT is expected to zoom to | 137.9 crore in FY17E vs. | 44.8 crore in FY14. Exhibit 35: PAT & PAT margin trend

80.7

44.2 44.8

82.6

106.4

137.9

0

20

40

60

80

100

120

140

160


(| c

rore

)

-

2.0

4.0

6.0

8.0

10.0

12.0

(%)

PAT Margin (RHS)


We expect EBITDA margins to recover to 16.5% in FY17E vs. 9.9% in FY14.

PAT is expected to grow at a CAGR of 45.5% in FY14-17E driven by healthy revenue growth and superior margins


Return ratios to improve led by earnings growth

Timken’s return ratios have been negatively impacted owing to a sharp decline in margins over CY08-FY14. We expect return ratios to improve, going ahead, as revenues and, consequently, earnings pick up, going ahead, on the back of an economic recovery. RoEs and RoCEs are expected to improve to 23.4% and 27.2% in FY17E vs. 11.7% and 14.5%, respectively, in FY14. The RoIC is expected to jump to 42.6% in FY17E vs. 16.6% in FY14.

Exhibit 36: Return ratios to improve

25.8

30.2

20.016.6

29.133.8

42.6

13.0 11.7

19.4 21.6 23.4

27.9

17.414.5

25.829.1

27.2

05

1015202530354045


(%)

RoE RoCE ROIC


Operating cash flows generated over FY15-17E to be utilised for capex

We expect Timken to generate strong operating cash flows of ~| 345 crore over FY15E-17E given the healthy topline growth and margin expansion.

Apart from the maintenance capex of ~| 30 crore per annum, Timken is expected to spend ~| 180-200 crore on incremental capacity in FY17E. This is expected to be funded partially by internal accruals and partly through debt of ~| 80 crore.

Exhibit 37: CFO to be utilised for capex needs, going ahead

42 31 32

89 91

165

4125 29

5030

210

0

50

100

150

200

250


| cr

ore

CFO Capex (including maintenance capex)

RoEs and RoCEs are expected to improve to 16.6% and 20.3% in CY16 vs. 13.1% and 16.6%, respectively, in CY13

Healthy earnings growth coupled with minimum maintenance capex would be the driver for strong FCF generation, going ahead


Risk & concerns Domestic demand pick-up delay may impact earnings assumptions Timken sells two-thirds of its products domestically. We highlight that the overall slowdown in the economy affecting the industrial as well as CV segment, has impacted the domestic business of Timken (decline of ~5% in FY14). A sustained slowdown in CV segment or industries may lead to an overall slowdown in sales growth and our earnings estimate.

Hence, we have run a sensitivity analysis to find out the impact of higher-than-expected or lower domestic demand on FY17E EPS assumptions

Exhibit 38: Sensitivity of domestic growth and its impact on change from base case earnings

11.0% 13.0% 15.0% 17.0% 19.0%

FY17E EPS 19.4 19.9 20.3 20.7 21.1

Domestic Topline Growth


Raw material cost rise could impact our earnings estimates A sharp rise in key raw material like steel could also pose a risk to our earnings estimates impacting the margins.

Hence, we have run a sensitivity analysis to find out the impact of a change in RM to sales on our FY17E earnings assumptions. We highlight that every 100 bps change in RM to sales would impact our earnings by ~7%. Exhibit 39: Sensitivity of RM to sales on FY17E earnings

31.0% 32.0% 33.0% 34.0% 35.0%

FY16E EPS 17.8 16.7 15.6 14.6 13.5

FY17E EPS 22.8 21.6 20.3 19.0 17.7

RM to Sales


Forex risk may impact financial performance Timken has forex exposure in the form of both imports and exports. Overall imports (in FY14E) constitute ~21% of revenues in the form of traded goods and raw materials while exports form 33% of revenues. Netting off, Timken’s exports are ~12% of revenues. While the export price adjustment is done, the major pain for Timken has been the sharp rise in import of steel due to rupee depreciation. We highlight that Timken does not hedge its net currency exposure and has indicated that any increase in cost of materials and traded goods is passed on to clients with a lag. However, any sharp headwind in the form of depreciation of INR vs. US$ could pose a big threat.

Every 1% decline in FY17E domestic sales would impact our earnings assumptions by 2%


Exhibit 40: US$ INR trend

40

46

52

58

64

70

Jan-

11

Apr-1

1

Jul-1

1

Oct-1

1

Jan-

12

Apr-1

2

Jul-1

2

Oct-1

2

Jan-

13

Apr-1

3

Jul-1

3

Oct-1

3

Jan-

14

Apr-1

4

Jul-1

4

Oct-1

4

Jan-

15

USD/INR


Increase in royalty

Currently, royalty, as a percentage of manufactured sales, is at 4%. These rates are decided at the beginning of the year. We highlight that any increase in the same by the parent could pose a risk.

Hence, we have run a sensitivity analysis to find out the impact of higher royalty on our earnings assumptions wherein every 50 bps rise in royalty rates would impact our earnings by ~2%.

Exhibit 41: Impact of royalty rates on EPS estimates

4% 4.5% 5.0% 5.5% 6.0%

FY16E EPS 15.6 15.4 15.1 14.8 14.6

FY17E EPS 20.3 20.0 19.7 19.4 19.0

Royalty Rates


Every 50 bps rise in royalty rates would impact our earnings by ~2%.


Valuation Timken’s topline growth has always been ahead of industry (23% CAGR over CY09-14 vs. ~8% for the industry) mainly on account of robust exports, which grew at 32% CAGR during the same period. The EBITDA margins of Timken have come down to 9.9% in FY14 vs. 17.5% in CY08 as a result of the rupee depreciation impact on imports and increase in proportion of low margin traded goods in overall sales. However, in the recent past, Timken has localised a considerable portion of its steel requirement while a stable currency has enabled the company to post a margin of 14.9% in 9MFY15.

Historically, Timken has traded at a premium valuation given its leadership position in the segment it caters to, strong parentage and healthy balance sheet signifying the strength in the business model. Given the anticipated growth opportunity in the railways and repairs & services business, the average one year forward P/E multiple in FY15 has jumped to 28x vs. 21x over the last 5 years.

Going ahead, exports would continue to lead the growth engine with newer opportunities like DFC and expansion likely to fructify over the longer term horizon. Given Timken’s leadership position in the tapered bearing space and huge opportunity in the railways segment and repair & services business, strong earnings growth (CAGR of 44% in FY14-17E) and healthy balance sheet with robust cash flow generation, we use PEG multiples for the fair valuation of the stock price.

We ascribe a PEG of 0.8x (implying 36.4x on the FY17E earnings) and arrive at target price of | 740 per share with a BUY rating on the stock.

Exhibit 42: Price/earnings

0100200300400500600700

Jan-

10

May

-10

Sep-

10

Jan-

11

May

-11

Sep-

11

Jan-

12

May

-12

Sep-

12

Jan-

13

May

-13

Sep-

13

Jan-

14

May

-14

Sep-

14

Jan-

15Price 40x 32x 24x 16x

Source: Company, Bloomberg, ICICIdirect.com Research

Exhibit 43: Price/BV trend

0100200300400500600700

Jan-

10

May

-10

Sep-

10

Jan-

11

May

-11

Sep-

11

Jan-

12

May

-12

Sep-

12

Jan-

13

May

-13

Sep-

13

Jan-

14

May

-14

Sep-

14

Jan-

15

Price 8x 6x 4x 2x

Source: Company, Bloomberg, ICICIdirect.com Research

We ascribe a PEG of 0.8x (implying 36.4x on the FY17E earnings) and arrive at target price of | 740 per share with a BUY rating on the stock.


Relative valuations Trading at premium multiples akin to MNC leaders in capital goods segment…

In order to gauge the premium multiples that Timken command, we compared it to a set of MNC companies that are present in the industrial products space and are leaders in their respective set of categories. The set of companies include Cummins India (leading engine manufacturer), Bosch Ltd (largest auto ancillary player in the domestic automotive industry), and SKF (the leader in bearings space in India). All these companies also boast a strong margin and cash flow profile with minimum leverage on their balance sheets.

We highlight that given the global presence & leadership of the above mentioned companies, they command premium valuations. For instance, Bosch, Cummins, SKF are trading at two year forward valuations of 43.2x, 25.7x, 25.1x, respectively.

Exhibit 44: Growth trend comparison

CY14 CY15E CY16E CY14 CY15E CY16E CY14 CY15E CY16ESKF India 6.2 14.6 16.5 8.3 24.2 25.6 21.6 24.5 25.4Cummins India 10.8 17.4 19.0 7.9 22.4 21.7 18.8 15.1 19.4Bosch Ltd 11.8 18.6 23.5 18.7 35.7 27.7 21.1 35.7 29.6

Average 9.6 16.9 19.7 11.6 27.4 25.0 20.5 25.1 24.8Timken India 27.5 15.3 16.8 80.4 27.0 24.8 84.6 28.8 29.6

Revenue Growth (%) EBITDA Growth (%) PAT Growth (%)

Source: Company, Reuters, ICICIdirect.com Research The estimates for Cummins India and Timken India are for FY14, FY15 and FY16 respectively

Exhibit 45: Profitability trend comparison



EBITDA Margin(%) ROE (%) PAT Margin (%)


Exhibit 46: Valuations comparison



P/E (1 yr forward) P/B (1 yr forward) EV/EBITDA (1 yr forward)


We highlight that given the global presence & leadership of the above-mentioned companies, they command premium valuations


Peer matrix

Timken along with other key MNC players in the bearings space in India like Fag and SKF have been trading at premium valuations with the strong parentage, healthy balance and market share that these groups command across the globe as well as the Indian bearings market.

We highlight that with an expected recovery in economic growth, the overall bearings pack multiples have been re-rated over the last year. Given the lower base and expected earnings growth over the next two or three years, the premium multiples seem justified.

Exhibit 47: Peer Matrix

M Cap(| Cr) CY14 CY15E CY16E CY14 CY15E CY16E CY14 CY15E CY16E CY14 CY15E CY16E CY14 CY15E CY16E

Timken India 4440 12.1 15.6 20.3 53.7 41.7 32.2 34.3 26.9 22.0 19.4 21.6 23.4 25.8 29.1 27.2SKF India 7944 38.4 47.8 60.0 39.2 31.5 25.1 26.2 20.7 16.0 14.3 16.0 17.6 16.2 18.6 21.0FAG Bearings 7287 92.0 143.3 152.1 42.9 27.6 26.0 23.3 20.1 16.9 14.6 19.2 17.8 11.0NRB Bearings 1258 4.7 6.8 9.2 27.7 19.0 14.1 12.6 9.8 8.0 18.1 22.1 24.4 15.2 19.0 22.5

RoCE (%)EPS (|)Company

P/E (x) EV/EBITDA (x) RoE (%)

Source: Company, Bloomberg, ICICIdirect.com Research *The estimates for NRB Bearings and Timken India is for FY15, FY16 and FY17 respectively


Tables and ratios

Exhibit 48: Profit & loss account (Year-end March) FY13 FY14 FY15E FY16E FY17ENet Sales 688.5 720.1 918.1 1,058.7 1,236.4 Other Income 5.5 10.8 11.9 13.3 14.9 Total Revenue 694.0 731.0 930.0 1,072.0 1,251.3

Cost of materials consumed 273.6 243.5 303.0 349.4 408.0 Employee Expenses 52.3 52.9 67.2 73.9 81.3 Purchase of stock-in-trade 145.3 205.9 262.6 302.8 353.6 Changes in inventories (1.8) (2.7) - - - Other expenses 145.7 148.9 156.3 168.8 189.1 Total Operating Expenditure 615.1 648.6 789.0 894.9 1,031.9

EBITDA 73.5 71.6 129.1 163.9 204.4 Interest 1.3 0.9 0.9 0.9 0.9 PBDT 77.7 81.5 140.1 176.3 218.5 Depreciation 13.9 15.8 18.6 19.8 21.5 PBT 63.7 65.7 121.5 156.4 197.0 Total Tax 19.5 20.9 38.9 50.1 59.1 PAT 44.2 44.8 82.6 106.4 137.9

EPS 6.5 6.6 12.1 15.6 20.3


Exhibit 49: Balance sheet | crore FY13 FY14 FY15E FY16E FY17EEquity Capital 63.7 68.0 68.0 68.0 68.0 Reserve and Surplus 277.7 314.3 357.2 423.8 521.9 Total Shareholders funds 341.5 382.3 425.2 491.8 589.9

Total Debt - 3.2 3.2 3.2 83.2

Deferred Tax Liability (4.4) (4.5) (4.5) (4.5) (4.5)

Total Liabilities 337.0 381.1 423.9 490.5 668.6

Gross Block 251.6 280.7 330.7 360.7 390.7 Acc: Depreciation 172.5 184.2 202.8 222.6 244.1 Net Block 79.2 96.5 127.9 138.0 146.6 Capital WIP 25.7 25.6 25.6 25.6 205.6

Investments 31.9 23.3 23.3 23.3 23.3

Inventory 140.3 136.8 163.5 188.5 169.4 Debtors 129.4 148.6 156.1 180.0 210.2 Loans and Advances 25.6 36.5 46.5 53.6 62.6 Other Current Assets 12.5 7.8 4.6 5.3 6.2 Cash 14.0 20.1 18.9 39.4 34.1 Total Current Assets 322.0 349.8 389.6 466.8 482.4 Current Liabilities 87.7 96.8 123.4 142.3 166.1 Provisions 33.9 17.4 19.1 21.0 23.1

Net Current Assets 200.3 235.6 247.1 303.5 293.1

Total Assets 337.0 381.1 423.9 490.5 668.6



Exhibit 50: Cash flow statement | crore FY13 FY14 FY15E FY16E FY17EProfit after Tax 44.2 44.8 82.6 106.4 137.9 Depreciation 13.9 15.8 18.6 19.8 21.5 Cash Flow before working capital changes 59.4 61.5 102.1 127.1 160.3

Net Increase in Current Assets (18.8) (21.7) (41.0) (56.8) (20.9) Net Increase in Current Liabilities (9.8) (7.5) 28.3 20.8 26.0 Net cash flow from operating activities 30.8 32.2 89.4 91.1 165.3

(Purchase)/Sale of Fixed Assets (28.9) (33.0) (50.0) (30.0) (210.0) Purchase/Sale of Investments 34.0 8.5 - - - Net Cash flow from Investing Activities 3.4 (24.6) (50.0) (30.0) (210.0)

Interest Paid - - - - - Inc / (Dec) in Equity Capital 0.0 4.3 - - - Dividend (15.9) (51.7) (39.8) (39.8) (39.8) Inc / (Dec) in Loan Funds (14.8) 3.2 - - 80.0 Securities Premium - 43.6 - - - Net Cash flow from Financing Activities (32.0) (1.5) (40.7) (40.7) 39.3

Net Cash flow 2.3 6.1 (1.2) 20.5 (5.3) Cash and Cash Equivalent at the beginning 11.8 14.0 20.1 18.9 39.4 Closing Cash/ Cash Equivalent 14.0 20.1 18.9 39.4 34.1


Exhibit 51: Ratio analysis (Year-end March) FY13 FY14 FY15E FY16E FY17EPer Share DataEPS 6.5 6.6 12.1 15.6 20.3 Cash EPS 8.6 8.9 14.9 18.6 23.4 BV 50.2 56.2 62.5 72.3 86.8 Operating profit per share 10.8 10.5 19.0 24.1 30.1

Operating RatiosEBITDA / Total Operating Income 10.7 9.9 14.1 15.5 16.5 PAT / Total Operating Income 6.4 6.2 9.0 10.0 11.2

Return RatiosRoE 13.0 11.7 19.4 21.6 23.4 RoCE 17.4 14.5 25.8 29.1 27.2 RoIC 20.0 16.6 29.1 33.8 42.6

Valuation RatiosEV / EBITDA 60.2 61.8 34.3 26.9 22.0 P/E 100.4 99.2 53.7 41.7 32.2 EV / Net Sales 6.4 6.1 4.8 4.2 3.6 Sales / Equity 2.0 1.9 2.2 2.2 2.1 Market Cap / Sales 6.4 6.2 4.8 4.2 3.6 Price to Book Value 13.0 11.6 10.4 9.0 7.5

Turnover RatiosAsset turnover 2.1 2.0 2.3 2.3 2.1 Debtors Turnover Ratio 5.3 4.8 5.9 5.9 5.9 Creditors Turnover Ratio 7.8 7.4 7.4 7.4 7.4

Solvency RatiosDebt / Equity - 0.0 0.0 0.0 0.1 Current Ratio 2.6 3.1 2.7 2.9 2.5 Quick Ratio 1.5 1.9 1.6 1.7 1.7



Appendix What is a bearing?

A bearing is a machine element that constrains relative motion and reduces friction between moving parts to only the desired motion. Bearings are highly engineered, precision-made components enabling the machinery to move at extremely high speeds and carry remarkable loads with ease and efficiency.

Types of bearings Exhibit 52: Types of ball bearings

Ball Bearings

Cylindrical & Needle Roller Bearings

Tapered Roller Bearings

Spherical Roller Bearings


Ball bearings

–Rolling function is provided by a ball –Low friction, high speed, light to medium loading –Light and general machine applications

Commonly found in fans, roller blades, wheel bearings, and under hood applications on cars etc.

Cylindrical & needle roller bearings

The rolling function is provided by a cylinder of some kind. May also be referred to as needle roller bearings (where length is greater than diameter)

-Low friction, medium to heavy radial loading

Commonly found in general machine applications including gearboxes and transmissions, machine tool and construction equipment.

Tapered roller bearings:

A tapered version of a roller bearing is used for combined axial and radial loads, such as in wheel applications on trucks

Commonly found in heavy industrial, railways, truck & wheel applications with combined radial & axial loads. Some examples are manual transmissions, gearboxes, power generation and other process equipment.


- A roller bearing that has a barrel shaped roller. - Medium friction, medium to heavy loads and misalignment capabilities Generally used for very high load applications with misaligned shafts to housings. Commonly found in gearboxes, conveyors, pulp and paper machines and other process equipment.


Industry Overview Global bearings industry The global bearing industry has been pegged at US$40 billion. The global bearing industry has remained muted over the last two or three years given the overall slowdown in the end user industry.

In terms of geographical spread, Asia commands 50% of the global markets led by China and Japan that command 25% and 15% share, respectively. Europe is also a major market with 25% share wherein Germany commands a handsome 10% of global production. The top six world bearing manufacturers (SKF AB, Schaeffler Group, Timken, NSK, NTN, and JTEKT) represent about 60% of the global rolling bearing market while the group of Chinese bearing companies, including small and larger ones, represents less than 20% in the world.

Exhibit 53: Global bearing market – Geographical distribution

Asia

50%

China 25%

Japan 15%

Others* ~10%

Europe

25%

Germany 10%

Others ~15%

America

20%+

US+Canada Mexico 16%

Brazil 3%

Others* 2%

Others

5%

Global MarketUS$40 billion


The automotive segment accounts for ~39% (~30% OEM and 9% after sales) of the bearing market while the remaining 61% (~40% OEMs and ~21% after sales) pertains to the industrial segment.

Exhibit 54: Global bearings market – Segment wise

Auto

39%

OEM

30%

Aftermarkets

9%

Industrial

61%

OEM

40%

Aftermarkets

21%


Asia commands 50% of the global markets led by China and Japan that command 25% and 15% share, respectively


Indian bearing industry - Product classification Bearings can be broadly classified into (a) Bimetal (very insignificant; used in engines) and (b) anti-friction bearings (wide application across industry and automobile industry). Antifriction bearings are grouped by the shape of the rolling element and call be classified into (a) ball bearings (forms 52% of the total demand) and (b) roller bearings (serves 48% of the market). Roller bearings can be further classified into tapered roller bearings, cylindrical roller bearings, needle roller bearings, thrust bearing bearings, spherical roller bearings and other special application bearings.

Exhibit 55: Classification of Bearing Industry – product wise

Bimetal Bearing Antifriction Bearing

Ball Bearing (52% of the total market)

Roller Bearing (48% of the total market)

Classification of Bearings

Tapered (42%)

Cylindrical (29%)

Spherical (17%)

Thrust (4%)

Needle (9%)

Bearings primarily used in engines of automobiles or machines

These bearings minimise friction by removing any possible sliding between

bearing surfaces and replacing all contacts with rolling interfaces


Exhibit 56: Types of bearings, usage & major players

Type of bearing Ball Bearings Cylindrical Roller BearingSpherical Roller Bearing Tapered Roller Bearing Needle roller bearings Thrust roller bearings

ApplicationWide applications in 2W 3Wand 4W. Used primary in wheels and axles

Cement & coal pulverizers, pumps, compressors, gear box, centrifuges. Mining eq. & transmissions

Gear boxes, casters, aggregates, Industrial conveyor systems, industrial fans

Wheels, differential & pionion configurations, conveyor rolls, machine tool spindles, trailer wheels.

Transmissions, transfer cases, engines & valve trains, steering & braking systems, axle supports, outboard engines, power tools, copiers

Classifiers, extruders, oil well swivels, pumps, pulp refiners, machine tools

Major playersSKF India, FAG, ABC, NEI

FAG, Timken, NEI, SKF, NRB FAG, NEI, SKF India

Timken India, NEI, SKF, FAG NRB, INA Bearings SKF, FAG, Timken India



Indian bearing industry – Economic recovery to propel growth

The domestic bearing industry, pegged at | 8000-8500 crore in FY14, accounted for less than 4% of the global bearing market. It comprises both the organised and unorganised segment. Organised players include global bearing majors like SKF, Fag and Timken that cater to the market through a mix of import from their parents (mainly for industrial bearings) and domestic manufacturing facilities. Other players in the organised space include domestic players such as NEI, NRB, ABC and Tata. In terms of market dominance, MNCs like SKF (28% share), Fag (18%) and Timken (9%) cumulatively command 55% of the overall market.

Exhibit 57: Break-up of market share (by sales)

Federal Mogul1%

Mahindra Sintered1%

ABC Bearings2%

Bimetals Bearings2%

Tata Bearings2%INA Bearings

6%

NRB Bearings7%

Unorganised8%

Timken Bearing9%

NEI16%

FAG18%

SKF28%

Source: Capitaline, ICICIdirect.com Research

In terms of consumption, 60% of the industry demand is met through domestic production while imports of industrial bearings, especially by leading players, meet the remaining 40% of demand. The bearing sector is equally distributed between the industrial and automotive segments. In terms of customer profiling, OEMs are the chief demand driver, with ~65% share while the after-market segment forms the remaining 35%. Exhibit 58: Total 60% of industry demand met through domestic production

Imports38%

Domestic 62%


The Indian bearing industry, pegged at | 8000-8500 crore, accounts for less than 4% of the world’s bearing market

Total 60% of the industry demand is met through domestic production while imports of industrial bearings, especially by leading players, meet the remaining 40% of demand


Exhibit 59: Equally distributed between industrial & automotive segment

Industrial52%

Automotive48%


Exhibit 60: OEMs chief demand driver, with ~65% share

After markets35%

OEM65%


Over the last two or three years, the industry has remained muted given the overall slowdown in the economy (IIP fell to 0.6% in CY13 vs. 9.7% in CY10) as well as stagnant auto sales (1.6% in CY13 vs. 30.8% in CY10). With industry linked usage and demand of the bearing sector, the long term prospects of the Indian bearing market would be led by the recovery in the overall economy. The economic recovery is expected to revive industrial as well automotive segment demand.

Exhibit 61: Slowdown in IIP, auto volume growth…

9.7

4.8

0.7 0.6

30.8

16.2

5.4 1.6

0

2

4

6

8

10

12

CY10 CY11 CY12 CY13

(%)

0

5

10

15

20

25

30

35

(%)

IIP (YoY) Auto volumes growth (RHS)


Exhibit 62: …leads to slowdown in revenues of all key players

10401309 1447 1430

20682435

2228 2275

473 592 607

720689468831

5600

500

1000

1500

2000

2500

3000

CY10 CY11 CY12 CY13

(| c

rore

)

FAG SKF Timken NRB


Over the last two or three years, the industry has remained muted given the overall slowdown in the economy (IIP fell to 0.6% in CY13 vs. 9.7% in CY10) as well as stagnant auto sales (1.6% in CY13 vs. 30.8% in CY10)


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Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai – 400 093

[email protected]


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