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Timken India CMP

Rs. 564

Target

Rs. 666

Rating

BUY

Stock Performance (%)

1m 3m 12m

Timken -1% 1% 36%

Sensex -8% -3% -4%

BSE Auto -11% -3% -3%

Financial Summary

Year Revenues (Rs. mn) EBITDA (Rs. mn) EBITDA Margin Adj. PAT (Rs. mn) Adj. EPS (Rs.) P/E(x) EV/EBITDA(x)

FY15 9,349 1,396 14.9% 807 11.9 47.5 27.3

FY16E 11,231 1,781 15.9% 1,077 15.8 35.6 21.5

FY17E 14,121 2,380 16.9% 1,508 22.2 25.4 16.0

Date Sep 16, 2015

Market Data

SENSEX 25706

Nifty 7829

Bloomberg TMKN IN

Shares o/s 68mn

Market Cap Rs. 39bn

52-wk High-Low Rs. 669-372

3m Avg. Daily Vol Rs. 27mn

Index member BSEMDCAP

Latest shareholding (%)

Promoters 75.0

Institutions 10.9

Public 14.1

Initiating Coverage Timken India (Timken) is the market leader for tapered roller bearings (TRB) in India. Being the subsidiary of The

Timken Company, USA, which pioneered TRBs, Timken has access to the best technology and solutions. We see

strong revenue visibility given high market shares in railways and commercial vehicles. With more than 1/3 of

revenues from exports to parent, we see this as a long term growth opportunity as the parent leverages on low

cost / high skilled engineering in India. Initiate coverage with a Buy; TP of Rs. 666 based on 30x FY17 EPS.

Strong visibility in the rail segment (~20% of sales): Timken India has ~60% market share in the key sub-segments –

rail freight wagons, high speed passenger coaches, metro rail and locomotives. It is a technology partner with Indian

Railways (IR) for bearings required on the DFC wagons. Given higher axle load and average speed, expect opportunity

from both value per wagon and volume of new wagons to be significant. Timken is also the only domestic manufacturer of

bearings for high speed passenger wagons (eg: Shatabdi) and is a beneficiary of metro projects being implemented across

India. While growth from DFC could be back ended, expect metro projects and opportunity for refurbishment/service of

existing wagon fleet to be a near term driver. Expect segment growth of 25% CAGR from FY15-FY17

Steep recovery in CVs (~20% of sales): Steep pick-up in CV volumes bodes well for Timken as it is a leading supplier of

axle bearings to the industry. Moreover, we see a significant opportunity for improvement in content per vehicle with the

improvement in mix towards multi-axle vehicles (> 25MT accounts for 42% of volumes now vs. 27% in FY11). Timken is a

100% supplier to Ashok Leyland (through Automotive Axles) and ~40% supplier to VECV. The company supplies pinion

bearings for few platforms to Tata Motors. Apart from CVs, the company supplies bearings to tractors (~45% share with

M&M, Escorts, John Deere, New Holland). Expect this segment to record a 27% CAGR from FY15-FY17 on the back of

continued recovery in the CV segment and the expected positive growth from tractors in FY17.

Exports and services: Exports have grown at a 29% CAGR in the last four years, and we expect growth to remain strong

at 20%+ in the next two years. We see the parent leveraging on Timken India’s strong engineering capabilities coupled with

low cost manufacturing. Services (~3% of sales) business coupled with non-bearing products such as gears, is expected to

be a long term driver in-line with parent’s goal to be a solutions provider for mechanical power transmission. The company

has a plant at Raipur solely for gear-box repair, this indicates the management’s focus on this market.

Financials and margins: Traded bearings (imported from parent) have recorded a CAGR of >40% over last four years,

helping the company achieve overall growth. FY15 also saw traded gross margin grow significantly to 27% vs. 15% in

FY14. We expect margins to remain at current levels and hence result in a PAT CAGR of ~37%. We expect Timken’s

growth to be significantly higher than its peers even as it has the best parameters in terms of return ratios.

Leading bearing manufacturer with exposures to the right end-markets

MUKESH SARAF [email protected] +91 44 4344 0041

RAMAKRISHNAN SESHAN [email protected] +91 44 4344 0020 Find Spark Research on Bloomberg (SPAK <go>),

Thomson First Call, Reuters Knowledge and Factset

Timken India CMP

Rs. 564

Target

Rs. 666

Rating

BUY

Corporate Factsheet

Promoter

Background

Timken India is a subsidiary of Timken Singapore Pte which is a subsidiary of The Timken Company, USA. The Timken Company

is the flagship company of the Timken Group. Founded over 100 years ago by Mr. Henry Timken, who received two patents on the

design of a tapered roller bearing. The Timken Company is a leader in the bearings industry which applies its deep knowledge of

materials, friction management and mechanical power transmission to improve the reliability and efficiency of industrial machinery

and equipment all around the world. It manufactures and manages global supply chains for multiple product lines including anti-

friction bearings, mechanical power transmission solutions, engineered steel and related precision steel components

Business

Timken India is a leader for taper roller bearing supplies in India and supply to India Railways, commercial vehicles and off-

highway applications on the mobile industries. The company is also large supplier in process industries comprising of metals,

mining, cement, power generation, wind, oil & gas, pulp & paper and food & beverage

Management

Mr. Sanjay Koul: Chairman & Managing Director. He has 28 years of experience and has been with Timken for 25 years. He was

previously national sales manager for Timken’s railway business, Plant Manager at Jamshedpur plant, general manager of Asia’s

supply chain and director of manufacturing and supply chain for Timken’s business in Asia

Mr. Amit Kumar Das: General Manager, Organisational Advancement. Prior to joining Timken in 2012, he worked at Asian Paints

Limited, Allergan Singapore Pte. Limited and Atul Limited.

Mr. R. Ramesh: Business Controller (India). Prior to joining in 2011, he worked at ABB Global Industries and Services Limited,

Alstom Power India Limited and Reliance Infocomm Limited

Presence Bearing manufacturing plant in Jamshedpur; Industrial gear-box repair plant at Raipur

Corporate Structure

75% owned by Timken Singapore Pte. Timken Engineering and Research India Pvt. Ltd. (TERI), located in Bangalore, is a fully

owned subsidiary of Timken Singapore Pte Limited. TERI caters primarily to The Timken Company with product technology,

manufacturing technology and information technology related work

Revenue Model ~20-25% each from Railways, CV/Tractors, Aftermarket (auto and industrial) and Exports accounts for ~35%

Key Success

Factors

1) Timken India is part for the Timken Group which is the global technology leader for tapered roller bearing. Timken India has

~60% market share with most railway and commercial vehicle applications. 2) Caters to new product lines by way of imports from

the parent and focuses on localising products with high volume potential 3) Looking to transform into a solution provider for

mechanical power transmissions 3) Significant export opportunity given the strong engineering capabilities in India as significantly

low manufacturing costs

Credit Rating ICRA Short Term: A1+

Auditors M/s S.R. Batliboi & Co., LLP

Timken India CMP

Rs. 564

Target

Rs. 666

Rating

BUY

Products Products

Bearings Industry in India

Indian Bearings Industry (Rs. 95bn in FY12, down to Rs. 85bn in FY15)

Source: Industry, Spark Capital Research * industry break-up as per FY12

Tapered42%

Cylindrical29%

Spherical17%

Needle9%

Thrust4%

Roller Bearing52%

Ball Bearing48%

After Market35%

OEM65%

Imports38%

Organised46%

Unorganised16%

Indigenous and Imported composition

Source: Industry, Spark Capital Research

Indegenous62%

Imported38%

Unorganised bearings primarily represent small scale manufacturers and suppliers of spurious

bearings. These generally have strong regional presence and cater to the replacement markets for

both industrial and automotive segments

Imported bearings account for ~40% of total Indian bearings industry. Imported bearings are primarily

used in the industrial markets, whereas automobile markets are catered to by manufactured bearings

Industrial segment typically requires customisation, large sized bearings and maintaining large number

of SKUs. Volumes for a particular type of bearings wouldn’t be large (as in the case of automobiles),

while portfolio of products would be large. Hence the major players in this segment prefer to cater to

the demand via imports

Most bearing manufacturers in India are MNCs having technology backing from the parent company or

have technology that has been acquired from MNCs.

Each of the manufacturers have specialised in certain bearing types and maintain market shares in the

respective segments

Electrical equipment

5%

Heavy Industries

20%

General Engineering

27%

Automotive48%

Timken India CMP

Rs. 564

Target

Rs. 666

Rating

BUY

Types of roller bearings, applications and major players

Type of

bearing Application Major players

Major Market

Share

Tapered

roller

bearings

Vehicle front wheels, differential &

pinion configurations, conveyor rolls,

machine tool spindles, trailer wheels

SKF India, FAG

Bearings Limited,

NEI, Timken India,

ABC Bearings

TIMKEN: 45%

Cylindrical

roller

bearings

Cement and coal pulverizers, pumps,

compressors, gear boxes, centrifuges,

mining equipment, transmissions

NEI, SKF India, FAG

Bearings, NRB

Bearings

FAG: 45%

Spherical

roller

bearings

Gearboxes, casters, aggregates, heavy

stationary, industrial conveyor systems,

industrial fans

SKF India, FAG

Bearings, NEI FAG: 45%

Needle

roller

bearings

Transmissions, transfer cases, engines

and valve trains, steering and braking

systems, axle supports, outboard

engines, power tools, copiers

INA Bearings, SKF

India, NRB Bearings NRB: 70%

Thrust roller

bearings

Classifiers, extruders, oil well swivels,

pumps, pulp refiners, machine tools

SKF India, FAG

Bearings, Timken

India

-

Ball

Bearings

Wide applications in 2W, 3W and four

wheelers. Used primarily in wheels and

axles

SKF India, FAG

Bearings, Timken

India, ABC Bearings,

NEI

SKF 65%


Each of the top companies have a niche and technology is from MNC parent/collaboration

Market share of top 5 players

Source: Spark Capital Research

SKF30%

FAG18%

NEI (NBC)13%

NRB8%

Timken8%

Most manufacturers have a technical collaboration with MNCs

Company Technology Relationship Specialisation

SKF India SKF, Sweden Subsidiary Ball bearings

FAG India FAG, Germany Subsidiary Cylindrical & Spherical

roller bearings

Timken India Timken, USA Subsidiary Taper roller bearings

NRB Bearings Nadella (France) and

INA (Germany) Acquisition Needle roller bearings

ABC Bearing NSK Japan JV / Technical

Collaboration Ball bearings

NEI Bearings NTN Japan Technical

Collaboration

Ball and Taper roller

bearings

Koyo India JTEKT Corp, Japan Subsidiary Single ball bearing,

Taper roller bearings

Bimetal

Bearings Clevite Inc, USA

Technical

Collaboration Engine bearings


Timken India CMP

Rs. 564

Target

Rs. 666

Rating

BUY Key segments include Railways, commercial vehicles and industrial/manufacturing

FY15: Revenue Rs. 9.2bn

Service Revenue: 3%

Manufactured Bearings: 61%

(includes exports : ~35% of revenue and

aftermarket ~13% of revenue)

Traded Bearings: 36%

Tapered Roller bearings primarily for

Mobile Industries 60-65% of India’s bearing market

Primarily for Process

Industries 30-35% of Indian bearing market

Commercial Vehicle / Tractors

(20-25% of revenues)

Freight

Application

Passenger

Application Locomotives

Tapered Roller Bearings

used in most Freight

applications in India

Timken is ~60% market

share in India

DFC would be a big

opportunity given the rise in

number of wagons

Freight wagons have aged

and replacement of these

itself could be a big market

Partners with Indian

Railways to refurbish these

bearings

Not present in the regular

coaches currently as

spherical bearings are used,

although the technology is

getting phased out

~60% market share for new

aged high speed coaches

(Shatabdi / Rajdhani). Also

export these bearings

Metro applications is a near

term growth driver


Railways to refurbish/service

these bearings

Market leader for supply to

locomotives


Railways to refurbish these

bearings

Key industries served include Metals, Mining,

Cement, Power Generation, Wind, Oil & Gas,

gear-drives, pulp & paper and Food &

beverage

Key customers include BHEL, Tata Steel,

JSW, CMI and Esmech Equipment

These bearings are primarily traded bearings.

i.e. imported from the parent company

Key products include spherical, cylindrical,

large size tapered roller bearings, specialty

ball bearings

Depending on the end-market and applications

the bearings are imported from different

Timken plants. For example, Cement bearings

are imported from China, while for defense /

aeronautical applications the bearings are

imported from USA

‘MILLTEC’ Bearing Reconditioning & Repair

Condition Monitoring and Reliability Services

Plant for gear box repair in Raipur –

technology came in from the parent acquiring

Philadelphia Gears

Key segment to aid in achieving the

company’s target of transforming into a

solutions provider for mechanical power

transmissions

Shanthi Gears and Elecon Engineering are

the key competitors in the gear-box

repair/components segment. High margin

segment with strong growth drivers

Given the nature of the application which

involves carrying high tonnage, CV and Tractor

applications use more of tapered roller bearings

Majority of supplies is for heavy commercial

vehicles

Primary supplies are for Axles, Transmissions

and Wheel end

Supply to tier 1 auto component companies

such as Automotive Axles

Key customers include Ashok Leyland, New

Holland tractors, Escorts, Dana and Fiat

Railways

(20-25% of revenues)

Timken India CMP

Rs. 564

Target

Rs. 666

Rating

BUY Timken India has seen significant revenue growth from exports and trading business in FY15

More than 1/3rd of the revenue is catered to by traded products

Source: Company, Spark Capital

Exports and traded segments have been the key revenue drivers

Source: Company, Spark Capital; * change in year ending to March from FY12

FY15 saw growth in both revenue and EBITDA margin


High exposure to CV and Rail end-markets


Manufactured, 61%

Traded, 36%

Service, 3%

57%

44% 30% 24%

25%

27%

33% 37%

14%

24% 33%

36%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

FY12 (15 months) FY13 FY14 FY15

Manufactured - domestic Manufactured - exports Traded bearing Service

13.5% 15.2%

12.8%

10.7% 9.9%

14.9%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

FY09 FY10 FY12 (15 months)

FY13 FY14 FY15

Revenue EBITDA Margin %

CV, 20%

Rail, 20%

Aftermarket / Process

industries, 23%

Exports, 37%

Timken India CMP

Rs. 564

Target

Rs. 666

Rating

BUY Timken India key products and applications

Market segment Product portfolio Application

Mobile Industries

Rail, Light Vehicle, Off highway, heavy trucks, auto aftermarket

Trucks and buses Taper roller bearings

Axles, transmissions, wheel end Lubricants

Freight and passenger rails


Wagons, locomotives, coaches Housings

Seals

Lubricants

Off-highway equipments, agricultural tractors Taper roller bearings

Axles, transmissions, wheel end, engine Spherical roller bearings

Process Industries

Heavy industries, Industrial processes, Gear drives, Energy, Industrial distribution

Metals industries, mines, cement plants


Casters, flat products, long products. Shovels, draglines,

Haul trucks, loaders material handling, crushing, screening,

vertical rolling mills

Spherical roller bearings

Cylindrical roller bearings

Lubricants

Seals

Condition monitoring equipments

Power generation plants, Taper roller bearings

Pulverizers, bowl mills, pumps material handling Spherical roller bearings

Gear drives


Industrial & planetary gearboxes, geared motors, fans Spherical roller bearings

Cylindrical roller bearings

Pulp and paper industries, food and beverages

industries Taper roller bearings Chippers/ debarkers, forming/press, dryer, calendar

Oil & Gas Taper roller bearings Top drives, mud pumps, crown / traveling blocks, rotary

tables, compressors Spherical roller bearings

Wind Taper roller bearings

Main shaft, gear boxes Spherical roller bearings

Manufactured in India Imported from Timken Group Locally Sourced in India

Timken India CMP

Rs. 564

Target

Rs. 666

Rating

BUY

Upcoming metro projects


City Status Project Cost

(Rs. bn)

Expected

completion

Delhi Phase 3 ~50% complete 353 -

Mumbai Phase 2 - 427 2021

Mumbai Phase 3 10% 231 -

Bangalore Phase 1 80%, 2 tracks operational 116 2015

Bangalore Phase 2 - 264 2020

Chennai Phase 1 60% complete 184 2015

Hyderabad 50% complete 141 2017

Kochi 30% complete 56 -

Jaipur 90% of phase 1 31 2018

Ahmedabad Approved by cabinet 107 2018

Nagpur Approved by cabinet 87 2018

Pune Approved by cabinet 118 -

Lucknow Approved by cabinet 69 -

Key drivers: #1 Railways to drive growth in multiple ways

Overall railway bearing market is estimated to be ~Rs. 10bn, out of

which freight application accounts for ~60%. Timken is positioned

strongly with ~60% market share in the freight segment and similarly

with high speed passenger segment. We expect the market size to

significantly expand with DFC, replacement of existing wagons and the

metro rail projects in various cities

Timken India is a technology partner with Indian Railways (IR) for

selecting the kind of bearings that will be required for the wagons on the

DFC. Hence, Timken is working closely with RDSO and will be major

suppliers of bearings required for new wagons

Typically an existing wagon would require eight bearings from Timken at

an average cost of Rs. 6,500 per bearing. We expect the average cost

per bearing to significantly increase as the speed and load requirements

increase

DFC to significantly increase speed and axle load


Feature Existing On DFC

Container

Stack Single Stack Double Stack

Train

Length

Train Load 4,000 Ton 15,000 Ton

Axle Load

Max Speed

700m 1500m

22.9 t/25 t 32.5t/25t for Track

Superstructure

75 KMPH – Single Stack 100 KMPH – Double Stack

IR has a wagon fleet of ~0.24mn, of which 0.14mn wagons are box-type

(coal transportation)

On an average the additional wagons required are ~15,000 per year –

while currently the procurement is lower due to inadequate ordering on

the back of financial crunch for the IR

With the DFC, industry estimates that the average number of wagons to

be procured would rise to ~75,000 wagons in the initial years. This would

be a significant positive for Timken India, given they are large suppliers

to wagon manufacturers

Apart from DFC, IR are planning to implement high speed passenger rail

corridors. This would again benefit Timken, given they are the sole

domestic manufacturers of Taper Roller Bearings for this application

Timken India CMP

Rs. 564

Target

Rs. 666

Rating

BUY

Outperformance is directly correlated to mix of HCVs (MAVs)


Expect strong growth in HCVs over the next two years


Key drivers: #2 Commercial vehicle growing in volume and value (HCV product mix)

Domestic revenues have outperformed the CV industry volumes


37%

46%

2%

-4%

20%

28%

20%

-2%

-20%

-3%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

CY10 FY12 FY13 FY14 FY15

Domestic Revenue YoY CV Industry YoY

Timken has a majority market share for the supply of TRBs in the HCV

segment. Approximate market share that Timken has with major OEMs

for axle bearings is as follows : Ashok Leyland ~100%, VECV ~40%.

M&M, Escorts, John Deere and New Holland ~45%. Also large supplier

to Tata Motors for Pinion bearings

The company’s domestic revenue (primarily auto and railways) has

significantly outperformed the CV industry. This is primarily on the back

of significant shift towards MAVs (multi-axle vehicles, > 25MT)

On an average Timken supplies four bearings per axle at an average

realisation of ~Rs. 6,000 per bearing. Increase in MAVs significantly

improve Timken’s average realisation per vehicle.

We expect steep growth in the CV segment to continue in FY16 and

FY17, moreover the growth would be lead by the HCV segment. This

would continue to benefit Timken India

19% 22% 20% 22% 26% 26% 19% 17%

29% 24% 22% 20% 22% 20%

17% 18%

43% 38%

31% 26% 25% 27%

25% 23%

9% 16%

27% 31% 28% 28% 39% 42%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY09 FY10 FY11 FY12 FY13 FY14 FY15 YTD FY16

7.5 - 12 MT 12-- 16 MT 16-- 25 MT > 25 MT

17%

-24% -22%

17% 21% 20% 12%

-30%

-20%

-10%

0%

10%

20%

30%

0

1,00,000

2,00,000

3,00,000

4,00,000

5,00,000

FY12 FY13 FY14 FY15 FY16E FY17E FY18E

MHCV Industry Volumes YoY %

Timken India CMP

Rs. 564

Target

Rs. 666

Rating

BUY Key drivers: #3 Timken India’s is low cost with high engineering capabilities to drive exports

…consequently increasing the share of export revenue


Increase in export revenue enabled by consistent investments in

capacity; fungible between domestic and export segments


25% 26% 33% 37%

75% 74% 67% 63%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014 2015

Export revenue% Domestic revenue%

Export revenue grown consistently even when domestic revenue was

sluggish…


0%

5%

10%

15%

20%

25%

30%

0

100

200

300

400

500

600

700

800

CY09 CY10 FY12 FY13 FY14 FY15 FY16E

Capex Capex as % of Op. Gross block

Timken has consistently invested and is expected to continue to invest in

manufacturing capacities.

These capacities being fungible between products for the domestic and

export markets, in the event of a slow down in either market, the

capacities can be used to service the other market

Historically, during a slowdown in the domestic market, Timken has

been able to scale up revenue in the export markets, maintaining its

fixed asset turnover ratio at a healthy >2.5xover the 6 years through

FY15

37% 46%

2% -4%

20%

56%

36%

8%

32%

44%

-10%

0%

10%

20%

30%

40%

50%

60%

CY10 FY12 FY13 FY14 FY15

Domestic revenue growth % (yoy) Export revenue growth % (yoy)

Timken India CMP

Rs. 564

Target

Rs. 666

Rating

BUY

Service revenue has been flat over the last four years

Source: Company, Spark Capital; FY12 (15 month year) as year ending change to March

Key activities under service/repairs business


Bearing Repair and Remanufacturing

Gear-box repair and

onsite services

Electric motor & generator

repair and controls

Service business for Timken India includes 1) repair services for rail and

industrial bearings, housings and gear boxes 2) Reliability services and

bearings inspection 3) ‘MILLITEC’ services under which the company

provides on-site maintenance and service for steel / aluminium mills

Management have significant focus on this business and have also set

up a plant in Raipur specifically for gear-box repair. The technology is

from the parent’s acquisition of ‘Philadelphia-Gear’ in 2011

The parent is looking to position itself across the world as a solution

provider for mechanical power transmissions, rather than a bearings

manufacturer.

Key competitors in gears segment: Shanthi Gears and Elecon engg


0

50

100

150

200

250

300

350

400

FY06 FY07 FY08 FY09 FY10 FY12 FY13 FY14 FY15

Key drivers: #4 Improving service / repair capability by way of parents support

-5%

5%

15%

25%

35%

45%

FY11 FY12 FY13 FY14 FY15

Shanthi Gears - EBITDA% Elecon Engg. - EBITDA%

The segment although currently small for Timken India, is a high margin business. We

expect significant growth, in-line with pick-up in manufacturing, infra and mining activities.

Other key players in the segment are Siemens-Flender, Premium transmission and New

Allenberry works

Timken India CMP

Rs. 564

Target

Rs. 666

Rating

BUY

Key drivers: #4 Improving service/repair capability by way of parents support

Timken India CMP

Rs. 564

Target

Rs. 666

Rating

BUY

The Timken Company, USA (parent) – focus on non-bearing

products/ services


Parent has diversified end-markets, dominated by process industries


Most of the acquisitions in the last five years have been in the repair/gear box services space as Timken is looking to expand its portfolio

Parent company’s is expanding its capabilities by way of strategic acquisitions

84%

61%

11%

21%

5% 18%

0%

20%

40%

60%

80%

100%

2001 Current

Tapered Roller Bearing Other Bearing Non-bearing Products/Services

About 50% of this is

power transmission

products and

remaining is services

19%

15%

11%

8%

7%

7%

6%

5%

5%

5%

4%

4%

3%

0% 5% 10% 15% 20%

Industrial Machinery

Automotive

Rail

Heavy Truck

Energy

Defense

Agriculture

Industrial Services

Metals

Mining

Civil Aerospace

Construction

Others

Timken India CMP

Rs. 564

Target

Rs. 666

Rating

BUY

Examples of how Timken has position itself to take advantage of the

aftermarket and service business


Timken India is also expanding its portfolio to ‘Adjacent products & services’

in line with parent’s goal

Timken India also offers ‘adjacent products’ related to mechanical power transmission like coupling, housed units, high performance grease, and

lubrication systems. The company calls this as the ‘Beyond Bearing Portfolio’

The gear-repair unit at Raipur with the capability of Philadelphia Gear focuses on industrial gear box repair, journal rebuilding and chock repairs. The

Raipur unit is currently serving customers ranging from Steel, Power, Cement and general industries.

The plant executed orders with offering of inspection, repair and upgrade of gearbox weighing from 2 -16 tons for wide range of domestic customers and

have also exported few gearboxes for cooling tower application to USA.

The company targets to expand services for gearbox parts and new enclosed gearboxes for domestic markets, also continue to look for opportunities for

exports back to USA.

Onsite MILLTEC program provides around-the-clock management of a steel mill's roll shop to minimize operational problems and downtime.

MILLTEC continues serve at customer sites and added a new site in Eastern India (in FY15) making total of 11 sites across India.

Timken India is extremely positive on the outlook for onsite services is as it plans to add more services for its existing and new sites

Parent company is targeting a broader market than just bearings


Adjacent Products & Services

Chains, belts, gear drives, couplings, brakes,

sprockets, clutches, lubrication, condition

monitoring, rebuild and repair services

Bearings

Spherical, Cylindrical, housed unit and ball

bearings

Tapered Roller Bearings

Rail refurbishment and service is a large opportunity for the parent. There is a large

installed base of wagons

Expected Life of a Wagon 35 Years

Typical Lifecycle for bearings and related components 5 Years

Lifetime revenue opportunity for a 100 car train ~$0.8mn

High service requirements for rolling mills is a huge opportunity that Timken addresses

by way of its 'MILLTEC' program

Level of criticality of rolling mill for a steel plant Extremely high

Failure in equipment can lead to the shut-down of rolling mill

Potential impact to the plant $18-50 per hour

Timken India CMP

Rs. 564

Target

Rs. 666

Rating

BUY

Peer comparison: Timken has superior ratios aided by better mix, exports & lower RM imports

Manufactured Bearings gross margin FY12/CY11 FY13/CY12 FY14/CY13 FY15/CY14

NRB 55.1% 52.4% 51.1% 52.3%

SKF 51.9% 48.6% 51.6% 52.5%

FAG 49.9% 49.2% 47.6% 46.4%

TIMKEN 42.8% 41.5% 44.7% 44.1%

Traded Bearings gross margin FY12/CY11 FY13/CY12 FY14/CY13 FY15/CY14

SKF 15% 17% 15% 16%

FAG 24% 15% 12% 22%

TIMKEN 17% 18% 15% 27%

Traded as a % of total revenue FY12/CY11 FY13/CY12 FY14/CY13 FY15/CY14

SKF 47% 46% 44% 44%

FAG 34% 34% 32% 31%

TIMKEN 14% 24% 33% 36%

EBITDA Margin % FY12/CY11 FY13/CY12 FY14/CY13 FY15/CY14

NRB 19.6% 16.2% 16.9% 18.4%

SKF 12.3% 11.6% 11.5% 11.5%

FAG 19.6% 15.2% 12.8% 14.8%

TIMKEN 12.8% 10.7% 9.9% 14.9%

Fixed asset turnover FY12/CY11 FY13/CY12 FY14/CY13 FY15/CY14

NRB 1.3 1.3 1.2 1.3

SKF 2.9 2.4 2.3 2.4

FAG 2.9 2.7 2.1 2.2

TIMKEN 3.7 2.8 2.7 3.2

RoCE (post tax) FY12/CY11 FY13/CY12 FY14/CY13 FY15/CY14

NRB 13.7% 11.4% 9.3% 11.4%

SKF 22.4% 17.5% 11.4% 10.9%

FAG 24.2% 16.0% 9.7% 11.9%

TIMKEN 18.8% 12.3% 10.4% 19.6%

Imported RM as a % of total RM FY12/CY11 FY13/CY12 FY14/CY13 FY15/CY14

NRB 30% 28% 28% 28%

SKF 43% 21% 27% 20%

FAG 30% 34% 36% 39%

TIMKEN 36% 36% 27% 21%

Exports as a % of revenue FY12/CY11 FY13/CY12 FY14/CY13 FY15/CY14

NRB 13% 22% 23% 25%

SKF 6% 7% 8% 8%

FAG 12% 14% 16% 18%

TIMKEN 25% 26% 33% 37%

WC days FY12/CY11 FY13/CY12 FY14/CY13 FY15/CY14

NRB 131 144 154 157

SKF 47 49 54 47

FAG 42 55 56 59

TIMKEN 68 110 109 100

Timken’s EBITDA margin has significantly improved in FY15 (1QFY16 improved

further to 16.9%). Similarly the company has seen a steep improvement in traded

business gross margin

The company has also witnessed a steady reduction in imported raw material and

components. This helps reduce FX risk and potentially lower raw material costs

Among the key competitors, Timken has seen a steady improvement in traded

revenues. We believe, the steady increase suggests that Timken is able to cater to

new end-markets, new products by importing the bearings. As the potential for the

segment improves significantly (over time), the bearings can be locally manufactured

Significant improvement in asset turns (including traded revenue) also resulted in

steep jump in RoCE

Timken has also witnessed a significant improvement in exports proportion. This

enables improving fixed asset utilisation and provides a captive growth driver. We

have witnessed other companies such as Wabco India, where the US based parent

has significantly scaled up sourcing from the Indian subsidiaries as a drive to

improve profitability

Timken India’s working capital days is however at the higher end, this is primarily on

the back of significantly lower creditor days and not due to debtors / inventory

R&D Expenses FY12/CY11 FY13/CY12 FY14/CY13 FY15/CY14

NRB 1.0% 1.2% 1.3% 1.1%

SKF - - - -

FAG 0.5% 0.7% 0.9% 0.6%

TIMKEN - - - -

Royalty as a % of Manufactured revenue FY12/CY11 FY13/CY12 FY14/CY13 FY15/CY14

NRB - - - -

SKF 5.0% 4.0% 5.0% 5.0%

FAG 2.4% 2.5% 2.3% 2.3%

TIMKEN 2.9% 3.0% 3.5% 3.1%

Revenue Mix comparison NRB SKF FAG Timken

Auto – Domestic 75% 43% 35% 25%

OEM 59% 29% 23% NA

After Market 17% 14% 12% NA

Industrial - Domestic - 49% 51% 38%

OEM - 18% 33% NA

After Market - 30% 18% NA

Exports 25% 8% 14% 37%

Timken India CMP

Rs. 564

Target

Rs. 666

Rating

BUY

Timken has the lowest cash as a % of total capital employed


Cash/capital employed FY13/CY13 FY14/CY13 FY15/CY14

SKF India 28% 31% 53%

Timken India 13% 11% 9%

FAG India 22% 24% 29%

Valuations and asset allocation

CMP MCAP P/E EV/EBITDA PAT CAGR EBITDA CAGR

Rs. Rs. mn FY14/CY13 FY15/CY14 FY16E/CY15E FY17E/CY16E FY14/CY13 FY15/CY14 FY16E/CY15E FY17E/CY16E FY15-FY17 FY15-FY17

NRB 115 11,146 29.2 21.4 18.0 12.0 13.9 11.6 10.7 8.1 33% 19%

SKF India 1232 64,940 35.9 32.0 28.9 20.8 23.4 21.5 19.5 13.5 24% 23%

Timken

India 564 38,312 85.6 47.5 35.6 25.4 53.3 27.3 21.5 16.0 37% 31%

FAG India 4135 68,725 56.4 45.0 35.9 30.5 36.1 27.1 21.6 18.0 22% 20%

SKF and FAG : CY13, CY14, CY15, CY16; FAG is based on Consensus estimates

We believe Timken is the best placed bearing company in terms of future growth

prospects, primarily on the back of visibility in the key end-markets and high

market shares in the segments that the company is present in.

In terms of capital allocation, we see Timken as the most efficient as the cash as

a % of capital employed is the lowest at ~10% vs. 50% for SKF and 30% for

FAG. Timken has also planned for capacity expansion reflecting the growth

drivers in Railways, Commercial Vehicles and Exports

As seen is the peer comparison in slide 15, Timken’s return ratio’s is the best.

We also see the expected PAT and EBITDA growth being highest for Timken.

Accordingly, Timken trades at 25x FY17 EPS, still below FAG at 30x

We assign a Buy rating for Timken India with a price target of Rs. 666, based on

30x FY17 EPS. Based on our target multiple, PEG ratio is ~0.8x, still below the

peers and in-line with other well placed auto component manufacturers such as

Amara Raja batteries and Wabco India

Timken India CMP

Rs. 564

Target

Rs. 666

Rating

BUY

Financial Summary

Abridged Financial Statements Key metrics

Rs. mn FY14 FY15 FY16E FY17E FY14 FY15 FY16E FY17E

Profit & Loss Growth ratios

Revenues 7,201 9,349 11,231 14,121 Revenues 4.6% 29.8% 20.1% 25.7%

Manufacturing & Other Expenses 6,486 7,953 9,450 11,741 EBITDA -2.6% 95.1% 27.5% 33.7%

EBITDA 716 1,396 1,781 2,380 PAT 1.2% 80.3% 33.5% 40.1%

Depreciation 158 168 196 232 Margins

EBIT 558 1,229 1,585 2,148 EBITDA 9.9% 14.9% 15.9% 16.9%

Net Interest Exp / (inc) 9 6 10 10 EBIT 7.7% 13.1% 14.1% 15.2%

Profit Before Tax 657 1,223 1,584 2,218 PAT 6.2% 8.6% 9.6% 10.7%

Tax 209 416 507 710 Leverage & WC ratios

Adj. Net Profit 447 807 1,077 1,508 Current ratio (x) 2.9 2.8 2.7 2.6

Balance Sheet (Rs. mn) Debtor days (Sales) 76 68 68 69

Shareholders Equity 3,823 4,384 5,134 6,232 Inventory days (Sales) 70 66 68 68

Loan funds 32 25 25 25 Creditor days (Sales) 38 34 35 36

Sources of Funds 3,856 4,410 5,159 6,257 Performance & turnover ratios

Net block 965 1,069 1,622 1,890 RoACE 10.4% 19.6% 22.5% 25.6%

Capital WIP 256 268 268 268 RoAE 12.4% 19.7% 22.6% 26.5%

Current assets, loans & advances 3,498 4,311 4,864 6,201 Total asset turnover (x) 1.3 1.5 1.6 1.8

Current liabilities & provisions 1,141 1,444 1,801 2,307 Fixed asset turnover (x) 2.7 3.2 3.3 3.5

Net Current Assets 2,356 2,867 3,063 3,893 Valuation metrics

Application of funds 3,856 4,410 5,159 6,257 Current price (Rs.)

Cash Flows (Rs. mn) Shares outstanding (mn) 68 68 68 68

Cash flows from operations 457 447 827 1,057 Market capitalisation (Rs. mn) 38,312 38,312 38,312 38,312

Capex (307) (264) (750) (500) Enterprise value (Rs. mn) 38,143 38,100 38,269 38,040

Free Cash Flow 764 710 1,577 1,557 EV/EBIDTA (x) 53.3 27.3 21.5 16.0

Cash flows from investments (300) (256) (750) (500) Adj. Per-share earnings (Rs.) 6.6 11.9 15.8 22.2

Cash flows from financing (159) (257) (246) (328) Price-earnings multiple (x) 85.6 47.5 35.6 25.4

Closing Cash and Cash Equivalents 201 237 69 297 Dividend yield (%) 1.2% 0.5% 0.7% 0.9%

564

Timken India CMP

Rs. 564

Target

Rs. 666

Rating

BUY Disclaimer

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Absolute

Rating

Interpretation

BUY Stock expected to provide positive returns of >15% over a 1-year horizon REDUCE Stock expected to provide returns of <5% – -10% over a 1-year

horizon

ADD Stock expected to provide positive returns of >5% – <15% over a 1-year

horizon SELL Stock expected to fall >10% over a 1-year horizon

Timken India CMP

Rs. 564

Target

Rs. 666

Rating

BUY Disclaimer (Cont’d)

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Disclosure of interest statement Yes/No

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