Buy Timken India; target of Rs 740: ICICI Direct

ICICI Direct’s research report on Timken IndiaTimken reported a 12.8% YoY increase in topline toRs.263.8 crore driven by strong performance across rail and heavy truck segment. Sales however was below our estimate ofRs.275 crore.  EBITDA increased 8.8% YoY toRs.35.3 crore. However, margins declined 48 bps YoY to 13.4% (our estimate: 16.3%) due to increased raw material cost due to currency depreciation and higher sales of low margin trading segment as purchases of stock in trade increased 12.1% YoY toRs.71 crore during the quarter. Interest and depreciation increased 33.3% and 28.4% YoY respectively toRs.5.3 crore andRs.0.2 crore during the quarter. Tax expenses increased 4.3% YoY toRs.10.8 crore in Q2FY16. Consequently, PAT increased marginally by 1.1% YoY toRs.21.0 crore, which was below our expectation ofRs.28.2 crore for the quarterOutlook and valuationTimken’s topline growth has always been ahead of the industry (23.9% CAGR over CY09-15 vs. ~10% for the industry) mainly on account of robust exports, which grew at 34% CAGR during the same period. The EBITDA margins had 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 as well as stable currency enabling the company to post a margin of 14.4% in FY15. 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 31.5x vs. 21x over the last five 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 32.3% in FY15-17E), healthy balance sheet with robust cash flow generation, we use PEG multiples for the fair valuation of the stock price. We maintain BUY rating with a target price of | 740/share (implying a PEG of 0.9x over FY15-17E) factoring in the huge opportunity that the company has in the railways and services segments, going ahead. For all recommendations, click here Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions

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