Timken India margins contract sharply on higher traded sales

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News: Revenue increased by 20.2% YoY (31.7% QoQ) to Rs 802.5 crore; higher than our estimate of Rs 707.4 crore possibly on account of increase in traded sales. Gross margins contracted sharply by 924 bps YoY (105 bps lower QoQ) to 38.5%; mainly on account of increase in raw material cost (up 41.5% YoY, +34% QoQ). Thus, EBITDA margin also contracted by 789 bps to 19.1% (vs estimate of 20%). The margin improved sequentially 204 bps on positive operating leverage. EBITDA declined by 15% YoY to Rs 152.9 crore on lower margins. However, it was higher than our estimate of Rs 141.5 crore on higher than expected revenues. PAT declined by 13.8% YoY to Rs 104.5 crore (vs our estimate of Rs 98.4 crore) but the same increased by 48% QoQ. For FY23, revenue is up 27.4% YoY to Rs 2806.5 crore with EBITDA margin stands at 20.0% vs 23.2% in FY22. FY23 PAT is up 19.5% YoY to Rs 390.8 crore.

Views: Though the revenue growth has been better than estimates but it is mainly driven by increase in traded sales which in-turn has impacted margins. We believe that Timken is expected to do well in the coming period led by investments in domestic manufacturing of spherical and cylindrical roller bearings which is currently being traded in India through imports. These bearings are widely used in process industries (mining, power, metals etc) and demand has been strong for the same. Margins are expected to improve with the domestic manufacturing of these bearings. Timken has diversified presence across verticals which are sensitive to capex cycle, augur well for the company in the medium to long term. Moreover, significant allocation to railways segment will further brighten business prospects and provide strong business visibility over the next few years.

Impact: Neutral