Buy Timken;target of Rs 594: ICICIDirect

ICICIDirect's research report on TimkenTimken reported a 12.5% YoY increase in topline to | 257.8 crore driven by strong performance across rail and heavy truck segment. Sales, however, was below our estimate of | 272.3 crore EBITDA increased 26.3% YoY to | 33.6 crore. Margins also improved 143 bps YoY to 13.1% (above our estimate: 11.8%) due to improved sales, lower employee cost (down 15.4% YoY) and decline in inventory carrying cost (-| 8.3 crore in Q3FY16 vs. -| 3.3 crore YoY) Interest and depreciation increased 33.3%, 27.6% YoY to | 0.2 crore, | 5.2 crore, respectively. Tax expenses increased 24.2% YoY to | 10.4 crore in Q3FY16. Consequently, PAT increased 13.8% YoY broadly in line with our estimate. The company received | 1.04 crore exceptional income, including which reported PAT increased to | 20.1 crore, in line with our expectation. Timken has historically traded at premium valuations of ~25x forward earnings, given its superior revenue growth led by exports, the huge opportunity and growth prospects in the railways segment. However, the recovery pace in demand has remained tepid. Accordingly, we have revised our earning estimates downward by 18.2% and 18.3% for FY16E and FY17E, respectively. We roll over our valuation metric on FY18E and derive a revised target price to | 594 (27x FY18E PAT) vs. | 740 earlier. The stock price, however, has corrected significantly since our last report. We believe the stock is available at a very attractive level at the CMP. Thus maintain our BUY rating on Timken. 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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