Buy Timken India; target of Rs 867: ICICI Direct

ICICI Direct's research report on Timken India

Timken India (TIL), a leader in the niche segments of engineered bearings and mechanical power transmission products, has entered into a definitive agreement to acquire ABC Bearings Ltd through a court - approved amalgamat ion process • ABC Bearings (ABC) is a manufacturer of tapered, cylindrical and spherical roller bearings and slewing rings. ABC operates primarily  out of manufacturing facilities in Bharuch, Gujarat and Dehradun,  Uttarakhand • The TIL - ABC deal is likely to con clude by March 2018, when the  latter’s shares will be dissolved and merged into TIL’s equity.  The shareholders of ABC will receive five shares of TIL for every eight shares they hold in the company • ABC reported topline, EBITDA and PAT of | 190.4 crore, | 32 crore and | 12 crore in FY17, whereas TIL reported topline, EBITDA and PAT of | 1056.2 crore, | 158 crore and | 97.2 crore in FY17.

Outlook
The implied valuation of ABC bearings at M C ap/sales ratio of 2.6x and trailing EV/EBITDA of 15.2x (FY17) seems expensive optically.  However, the underutilised capacity and cost efficiencies that will accrue to TIL may result into strong revenue and PAT gains. For instance, even if TIL is able to ramp up utilisation to 70% by FY19E, it will result into revenues of | 296 crore (for ABC). This will lead to 1.8x rise in EBITDA by FY19E. This would imply valuations of 1.6x MCap/sales and 8x EV/EBITDA making the deal EPS accretive for TIL. Given the strong parentage and operating history of TIL, we believe the deal will also be value accretive for TIL’s shareholders.  Accordingly, we now value the stock at 40x FY19E (merged entity multiple) to arrive at a fair value of | 867 and upgrade the stock to BUY. Key upside risks can be higher - than - expected asset turnover and better operational efficiency that can drive higher PAT for the acquired asset (ABC in good times has generated margins in excess of 20% wherein we are building in 18% margins for the same in FY19E). For all recommendations report, click here

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