Expect double digit growth in the wind-energy business– Timken India

Update on the Indian Equity Market:

On Thursday, NIFTY closed higher at 17,536 (+0.7%) led by REALTY (+2.0%), OIL & GAS (+1.9%), and HEALTHCARE (+1.6%), while AUTO (-0.5%), PSU BANK (-0.5%), and FINANCIAL SERVICES (-0.2%) ended lower. Among the Nifty50 components, RELIANCE (+6.4%), DIVISLAB (+2.4%), and ITC (+1.8%) ended higher, while MARUTI (-1.3%), BRITANNIA (-1.2%), and IOC (-1.1%) ended lower.

Excerpts of an interview with Mr. Sanjay Koul, MD, Timken India with CNBC TV-18 on 24^th November 2021:

• The business is continuing to recover, and they have seen strong 2QFY22 results, albeit on a low base.
• Looking ahead, end user market demand in commercial vehicles or off highway raw materials is picking up, and the Indian government is going ahead with the infra push, and railways are back on track, all of which are very good signs for the company.
• The export market is improving as a result of China’s current problems, and there is a strong demand for freight. Manufacturing plants are completely occupied.
• The export market is picking up as problems in China are helping the business, good demand is seen on freight. Manufacturing plants are fully loaded.
• There is strong demand across all categories. Commodity price inflation is an issue and the firm is in discussions with their B2B clients.
• Commodity price hikes have been passed on to customers by the corporation. Revenue of Rs 20,000 mn is expected in FY22E. EBITDA margins will remain stable at 20-22 percent.
• On a year-over-year basis, the company’s revenue in the wind-energy industry has been around Rs 1,000 mn. The company anticipates a double-digit growth rate in the business.
• There are gear box manufacturers in India’s wind business. The gearbox market is rather healthy, and India has been looking for export potential. China’s wind market is down, and geo-political tensions with China provide India an advantage.
• The company is in discussions with one of the top Indian companies intending to enter the wind-energy business.
• Rail exports to Europe and North America are developing quite well, and they have begun to trickle into Russia, where they should gain traction in the future. During the epidemic, Indian passenger rails were shut down, but as the situation improves, more rail bearings are utilized. Rail exports have increased, although the global rail market remains subdued.
• Orderbook contribution are around 22% rail, 22% heavy truck, 20% distribution, 35% exports, and the remainder is auto.
• The company has been investing heavily in Barooch and Jamshedpur facilities in last 18 months. They have started making certain parts which used to be imported earlier.

Asset Multiplier Comments

• Timken’s customers come from the defence, mining, aerospace, agricultural, rail, energy, and automotive industries. The company’s sales performance will improve as the Indian economy recovers.
• The government’s Atmanirbhar Bharat initiative, which focuses on indigenous infrastructure development, has benefited industries ranging from defence to automotive, which includes some of Timken’s clients.

Consensus Estimate: (Source: market screener and Tikr.com websites)

• The closing price of TIMKEN was ₹ 1,925/- as of 25-November-2021.  It traded at 53x/ 41x/ 33x the consensus earnings estimate of ₹ 36.3/ 46.9/ 58.3 for FY22E/23E/24E respectively.
• The consensus price target is ₹ 1,757/- which implies a PE multiple of 31x the earnings estimate for FY24E of ₹ 56.8/-

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