In India, commercial vehicles unlikely to do well in 2020: Timken India CMD

Update on the Indian Equity Market:

On Tuesday, NIFTY closed at 12,052 (0.5% higher). Among the stocks, Vedanta(+3.7%), Zee (+2.4%) and Ultratech Cement (+2.0%) were the gainers. Infratel (-1.8%), BPCL (-1.5%), and Infosys (-1.3%) were the top losing stocks. Nifty Realty (+1.9%), Nifty Media (+1.0%) and Nifty Financial Services (+0.8%) were the top sectoral gainers. All the sectors ended in the green.

Excerpts from an interview with Mr Sanjay Koul, CMD, Timken India published in Economic Times on 06^th January 2020:

• Every time the emission norms change, there is a dip in the market. The commercial vehicles market dipped before the emission norms came into effect. This time because of the axle load change and the rest of the liquidity issues played a role and demand dipped.
• According to him, the rebound is also going to be a little bit early because of the fact that the inventory corrections have taken place in the market, liquidity is going to be sorted out and is sure that the man on the road is going to be able to borrow the traditional LFOs and small truck owners will be able to go and borrow money.
• While the inventory correction has taken place, there is going to be a little bit of pre-buying. So, January-February should be okay. After that, as the liquidity eases out and freight movement takes place, there might be a pleasant surprise of the markets coming back a little bit early.
• Timken serves fragmented markets. Anything which has wheels or anything which is moving on stationary equipment needs a bearing. Timken has the strategy of serving the diverse fragmented markets – be it on-road, off-road, off-highway, rails, trains, power, coal, mining.
• A large part of Timken’s business comes from the power transmission space. Timken sees a very strong offtake in terms of the wind market. Wind power has taken off, not only for domestic consumption but also a lot of gearbox manufacturers are exporting gearboxes out of India to other markets, including China.
• According to Mr Koul, in 2020, in India commercial vehicles would not do well, but they would start coming up slowly and steadily. Rail in India would be pretty much good which is divided into locomotives, freight, and passenger. In passenger, there is a further division into mass rapid transportation, which is the Metro rail. In India, the rail system including metros is being modernized and they are being made high speed and highly safe. This market would be pretty okay. As the infrastructure push from the government takes place, the off-highway market should be okay and this is seen in December which was a decent month as far as the excavators and backhoes are concerned in India. Power coming out of thermal should not be great but at the same time, the wind would be pretty much good. On the whole, 2020 would be a mixed bag for Timken. The commercial vehicles which have huge traction as it consumes a lot of small bearings might not be great. The other areas which consume large value bearings would be okay.
• Exports have been an important part of the Company’s strategy. For many years, they have been exporting both in terms of heavy trucks of highways and railway systems. Timken will continue exporting these to different markets around the globe. Timken currently serves Chinese, African, American, European and Russian markets. If one market is down, another market would be up. The Company has been able to serve these different export markets. But when the global markets are struggling themselves, it is a challenge for emerging markets as the supply chains have not really changed a lot in the last decade or so. But still, exports are okay for Timken, if not great.
• For margin expansion, there are two aspects according to him. One is the cost and the other is pricing. Cost is the aspect which will act as a catalyst for Timken going forward. Timken is working on cutting waste. The Company makes sure that they do not waste a downturn. The Company continuously works on the cost front so that they optimize and generate less and less waste. Whereas on the price front, there is going to be stagnant pricing.
• Timken’s endeavour is to make sure that they keep on generating as much value as possible as they are the leader in supply chaining the bearing pieces. Thus, Mr Koul is not unduly worried about the margin front.

Consensus Estimate: (Source: market screener website)

The closing price of Timken India Ltd was ₹ 900/- as of 07^th January-20. It traded at 33x/30x/25x the consensus earnings estimate for FY20E/ FY21E/ FY22E of ₹ 27.6/30.7/36.7 respectively.