Timken India Limited (522113) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Timken India Limited conference call hosted by Monarch Networth Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Angad Katdare from Monarch Networth Capital. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone. We are pleased to host the senior management of Timken India represented by Mr. Sanjay Koul, Chairman and Managing Director of Timken India; and Mr. Avishrant Keshava, who is the Chief Financial Officer and Whole Time Director of Timken India. Let us start the call with the small brief from the management, and then we'll move on to the Q&A. Thank you, and over to you, sir.

Thank you, Angad. Thank you very much. Thanks, everybody. Good afternoon for joining the call. The main agenda for my call is I owe at least fair communication that our principles carry [indiscernible], which obviously everybody must have known in the marketplace sold off our 10% stake, and which brings the Timken Singapore stake from 68% down to 58%. And obviously, we started with a stake of 80%, then went down to 75% as the law of the land mandated and then we did a no cash share swap deal when we took over ABC, we came to roughly 68% and now the principle for strategic reasons have used the stake, and we are at 58% now. And with that, I wanted to communicate that the strategic direction of the company that is Timken India Limited remains the same because Timken still remains majority or anything above 50 remain majority stakeholders and in terms of technology in terms of related things, everything remains the same. And we will continue serving the market of both exports which is our major segment and then followed by the domestic market, which is a real industrial aftermarket, REs are becoming more important. So, we will remain focused as we were. And as I have communicated before, also, we don't play these commodity markets of 2 million or 3 million small cars. So we will remain focused on rail, on RE that is becoming bigger and better in India, metal passenger freight, et cetera would individually becoming another new important market. So we remain focused on that. As I have been telling before, as well, the Indian bearing market is less than USD 2 billion, while as the Chinese bearing market for example is USD 20 billion. So there is a huge [indiscernible] growth coming into India as India becomes better and better on industrialization. We have a $3.7 trillion going on to $5 trillion manufacturing slowly becoming 25%, 20% to 25% of that. So this pie is going to become bigger and better. Our focus on our building our new plant in Bharuch is same. We are building that at a very high speed. And hopefully, by the end of next year, we will have the [indiscernible] rolling out [indiscernible] been focused on creating value, which is our business model. We are creating value and using all our engineering might to go after [ hast ] application. Megatrends in India remained pretty good. Our organization in smart cities, they are coming up, which is important for infrastructure. Electrification is happening which is also good in the sense that railways are getting electrified those are the auto OE side, we don't get impacted much currently. Energy transformation is very important. I think everybody knows that on the wind -- offshore wind energy, there's a new focus from government of India, which is very, very important. Our population growth, which is helping food and beverage market to grow. And then AI and digitalization is helping manufacturing a lot. So with that, I will stop here for a minute and see if there are any questions. The main idea of today's call was to communicate that Timken remains focused on the Indian market, it is the home market. TIL remains same focused. And as you know, our peer group ownership is also in the 50s. So it is nothing new or strange. But we will keep on growing in India. And TIL will remain the strong Timken arm in India in terms of their value add, and we remain focused on creating more value for our shareholders. I'll stop in and take if there are any questions.

[Operator Instructions] Our first question comes from the line of Vipul Shah with Sumangal Investment.

Sir, what type of turnover we can expect once this expansion program of INR 600 crores is completed within 2 years?

So the turnover over a period of time for every dollar in [indiscernible] every rupee it is 2x to 3x the -- is the asset turn going to be. It obviously, the ramp-up and all that taking place will take 2 to 3 years to reach that, but that is what we aim for.

So the final asset sir will be $3 per $1 of CapEx. Is that understanding correct?

Between the $2 to $3.

Our next question comes from the line of Mahesh Bendre with LIC Mutual Fund.

Sir, just wanted to know -- I would like to hear from you regarding the near-term business outlook both in domestic and export. Although we had reported a very good growth last quarter. But if you look at the peers' numbers, they were not very encouraging. So I'm just trying to understand for industry as a whole, where do you see near-term outlook?

So I'm not going to give TIL outlook for future. I'm not going to tell what is our forecast for -- this work in general. India is doing okay. So in general, India as a country is doing pretty much okay. Though, there are dips here and there. So we don't see the reel slowing down or see the [indiscernible] though, obviously, monsoon and it is cyclical in nature, so those things are out there to play. But overall, domestic remains pretty much okay. Exports on our side, we export to the world. But in general, we see that American market, there is a huge sentiment there, which is suggesting that there is going to be a recession. My personal take is that it is going to be softening of the U.S. market, not completely falling by the rock. So that is what is in general. And as we speak, we are seeing pretty much okay traction on our plants.

Our next question comes from the line of Abhishek Ghosh with DSP.

So just a couple of questions in terms of the stake sale that has been done by the promoter entity. If you can just help us understand, is there a need of cash at the parent level or how should 1 look at it? While you have mentioned that the commitment remains the same. But just from understanding because the last 2 dilutions which we had seen was largely on account of 1 was to bring down the overall stake below 75%. And second was because of the Indian acquisition. So if you can just help us understand, it will be helpful, sir.

It is a promoter's call, so I'm not privy to that call. But in general, as we understand, Timken is pretty much a stable company, is 1 of the most profitable bearing companies. So I'm sure this is for strategic reasons, not for any reason, which is urgent or immediate or catastrophic to nature. So this certainly must be for strategic reasons. But at Timken India Limited, tactical level, functioning level we are galloping and we are working towards our targets. So there is no change on that. As far as how that cash will be used and further, they would announce it in times to come, they will reflect in their own earnings. But these are certainly for strategic reasons and not for any catastrophic reasons.

Okay. Okay. That's helpful, sir. Sir, the other thing is if you just walk through your margin profile over the last few quarters, they have been fairly volatile and if you look at it, in last 2 or 3 quarters, the margin profile has been a softer because of, I think, the product mix. So how should 1 expect in terms of margin profile? Is it only going to come up with better exports now that raw material prices are beginning to come down? Just some color there will be helpful, sir.

Big color I can give you, looking at, say, last 5 years, the revenue for Timken India Limited in the last 5 years. If I take '18 as the base have doubled. Our EBITDA margin has been around 20%, 20-plus percentage even FY '22, we were at 23%, then we came down because, obviously, of the alloy steel pricing as our EPS last 5 years has been a CAGR of 31%. So now looking at quarter-by-quarter, obviously, there are no volatilities. There was, 2 years back, logistics was a big challenge, steel became a big challenge. So all these challenges were very much there. Now the steel prices are coming down. And then the battle still remains with the OEs that energy cost has gone up, manpower cost has gone up, so those cannot be passed on. So these are continued -- there is in the Indian market these things are volatile. But I think generally, if you see over the last 3, 4 years, we've been at the rate of -- EBITDA has been at the rate of 20 plus. So that has been our history so far.

Sir, just 1 last question. Railways, which is almost about 16%, 17% of your overall top line of FY '23. That seems to be seeing a lot of inflection and there seems to be a lot of growth, which is coming in. how should 1 look at that segment over the next 2 to 3 years given the overall investments that 1 is seeing in terms of manufacturing the new Vande Bharat trains. Just the thoughts there, what can it look like in next 2 to 3 years, sir?

So I think rail will always grow in India because the base of the rail in India is pretty much unique. So this has to keep on growing, though this pace could be very fast, but it will be pretty decent growth in next 10 years. There has to be -- more freight corridors has to be built. The old [ shellanian ]will have to go away. If you -- we had -- the railways had a serious accident in Orissa. But if you see the coaches did not crumple from this time because freight eligible coaches were used. Though there was obviously high-speed disaster there. But generally, if the [ shellanian ] have been, they would have all collapsed. That way the God for the good has been very, very high. So all this Vande Bharat is just that is coming out of the latest platform out of railways. So this growth will remain there. This growth has to go. India has to carry more freight, more dedicated freight going do more explore, more passengers. Now that the passenger wants more comfort. So obviously, Vande Bharat and Allied Trains just now they announced Vande Bharat with sleeper. So all this will mean that more and more build has to take place. And also, I see a lot of traction from railway ministry now on safety, which means that only technological companies, which have really technical strength will be able to deliver those products which now the railway is asking for. So I think it is going to remain solid for good companies in bearing and allied areas. And we are influenced in this market, very well influenced and we will for sure continue to develop.

Our next question comes from the line of Bharat Sheth with Quest Investment Advisors.

So in your opening remarks, you say -- have also mentioned that RE is a major focus. So, so far, I mean, this wind power was not very significantly happening in India. And which now all I mean, whatever issues have been resolved by the government. And we are understanding there is a huge traction in the RE side. So if you can give some color on what our current level and how do we see that business? And you also alluded on the export to U.S. So where do we like to see our export? So in coming 5 years, the way you said in 5 years, we doubled. So on this base, how do we see 5 years?

So on the RE side, if you see India is pretty much burning coal to generate power. Still our majority of the electricity is coming from coal based plant. And it is only the last 4, 5 years now, solar is contributing. India is blessed with a long shore line. Though the wind tunnel in-land is weak, but our offshore capability is huge. So India [indiscernible] today is making gearboxes, which are getting exported out of India. The Chinese plants are full, the gearbox, the good companies, their capacities are full. So even for export of the gear boxes, there is a good chance for India to ride the wave. Obviously, every company sees a little bit differently, I don't know how our peer group is looking at it. But how we look at it currently ourselves is that the RE has become -- given within our portfolio of Timken India Limited, it has almost -- it is double digit of our portfolio and this offshore as they install the 8 megawatt, 6 megawatts, I was calculating what they said 140. 140 terawatts and divided by 6-megawatt 20,000 gear boxes and allied equipment would be required if government of India hits the plan of their wind energy. So I think wind energy has a big scope, because India generally is producing very few out of wind shore line is great, especially the shores in the side of Kutch, et cetera, while we cannot use it much for war-time navigation. So that can be used pretty nicely. So I think that coming times on wind, both for domestic and I hope for exports also remain vibrant [indiscernible] will start exporting more and more out of India because the European wind market is going to compete. The European in Europe will be competing with the Chinese in market. So best cost countries will remain very important. So I think wind is going to be growing in India. And for the bearing guys, if it is a direct drive or if it is gearbox driven, a lot of bearings will get consumed. The size range, we'll have to see what kind of size ranges will be required for that. So as far as exports are concerned, Timken India is committed to have a well-diversified market, sector mix and export is part of that. We have been consistently exporting as you see, last more than a decade, it has remained a good share, and it will remain as a good share our export out of our Jamshedpur plant and Bharuch plant, and then future the new plants which we are building at Bharuch. We all are focusing for critical markets strategic market within India, but at the same time, export is going to remain important because of the fact that large wins out of India going to ASEAN, going to Australia is a lot more convenient than any other place, et cetera. So we will remain well focused on exports, it remains Important for the principal as well to utilize India as its best cost country source. And obviously, China Plus One is playing its role as well. So all put together, I see exports will remain from now. Now obviously, every market will not remain always growing around the world, there will be dips and ups and down. So that has to be seen over a period of time. But generally, for us, exports will keep on growing. And as we have proved in the last 5 years, we have doubled, obviously, we want to keep on growing our share of business in India, growing our exports out of India and Indian market is growing at 7%, 8%. So 7%, 8% plus, if I outgrow the market a little bit, so that can tell you the story on how do we want to grow in the Indian market.

Adding to this REs side, when we are talking of offshore where the bearing requirement will be much larger. So are we in favor, have an a strategy to whenever opportunity come to manufacture in India or will be importing?

So in order to obviously -- we have to see how it grows. And depending on what size it is going to be 6-megawatt or is it going to be 14 megawatts. So it is still unknown. But as it unravels large-size bearings in India are still not produced, the supply chains are still evolving in that steel for large mode is still not available. But everybody is watching as I have connected to the industry. So everybody is watching how it is going, what kind of investments are required both in terms of steelmaking or forgings and things like that. So all that is going to evolve. And initially, we will certainly use our global facilities and import into India. And as the critical mass goes, definitely, these are large bearings. They are -- they should be made closer to the customer rather than away from the customer.

Our next question comes from the line of Mukesh Saraf with Spark.

Just a question from my side, again, from the [indiscernible] strategic perspective. How do -- is there any change in the way the parent is looking at the other entity in India at Timken Engineering? Could you give some color on that? So will there be any change in the way we deal with them and the parent uses that entity, anything on that side will be helpful sir.

Mukesh, sorry, your voice was breaking, but if I could get the question, is it that how the principal would look at the other entity in India?

Yes, yes, absolutely, sir.

No change in that. Absolutely no change in that. Timken India Limited would be the growth engine for Timken in India, both in terms of investment and sales in India and that focus remains. I don't think that is changing anyway. It is going to remain the focus as TIL as the growth engine. And obviously, for good governance, globally, we want to make sure that we follow the good governance rule and that is how Timken that works globally. So that is see what happens in the future, but TIL remains the focus.

And just in continuation to that, sir, once our plant in Gujarat starts, will there be any difference in the way we deal with Timken engineering in terms of some of its parent goods there? Will you want to be manufacturing more of those at the Gujarat facility?

Same. We -- if -- again, your voice is not clear. So whatever we manufacturing Bharuch, those sizes will only be made in TIL in Bharuch, Engineering will be free flowing. So -- and we follow the same royalty pattern.

Our next question comes from the line of Achala Kanitkar with Aditya Birla Capital.

Chanchal here, Achala's colleague. Just -- most of our questions are answered, just 1 thing. Globally, you have diversified to industrial motion, which is almost 30% of the business. India bearing is the bigger component. So any thought on diversification of India business and becoming a big industrial player?

So that is absolutely a great question. And globally, obviously, Timken company $1.4 billion worth of revenue out of the $4.5 billion is coming out of the companies like Rollon, Drives, GGB, BEKA, Diamond, [indiscernible], et cetera. So all these are basically -- if you see, these are the companies which Timken Company has taken over, and they have taken them over with a certain strategic intent. If you see in powertrain, industrial motion engine bearing, they are adjacent products. They are all close to each other. If you see a power train in any industry, you'll see bearings, motors, split bearings, gearboxes, couplings, the brake, chain, belt, mountain bearing, lubrication system, clutch. So all this is part of the drive train. And if you go to any company, this is how the drive train will look like. Generally, we are giving them bearing, somebody who give the coupling, somebody was giving the clutch, and Timken has taken over these companies, which I just mentioned. Now Drives for example, is a coupling company. Diamond is a chain company. Rollon is a linear motion company, et cetera, et cetera. So now you look at it holistically all these companies were still in the payers have taken over, they are generally either based out of America or they were out of Europe. Now, North America, Europe are not today among the best cost countries in the world. all these bearings need the same kind of engineering extra, which is they a need steel, they need forging, they need machining, they need heat rails, they need related kind of things. So I think we still do not have any firm plan to start sourcing. But it is a matter of time that these dots have to get connected. And they are important because Indian market itself, lubrication market, chain market, coupling market, there are very nice markets. And for sure, they need technology product. And Timken has the technology now Through Rollon, through BEKA, through GGB, through [indiscernible] we have got those technologies available. So it is a matter of time these dots get connected, and we can serve the customer complete package solutions. So that is what it could eventually lead to. But if you say, an I going in tomorrow, no tomorrow is not happening, though we are doing some sales currently by importing for example, Pune Metro has our lubrication system, which we did import and assembled here in India, and we installed that and it's running great. So -- but this is actual. India is best cost country, China plus 1, all that put together, and these companies are in North America and Europe.

Today the 5% of the sales will be coming from this industrial motion in India that...

[indiscernible] In India is miniscule.

Understood. So globally, because of your acquisition, your debt is almost $1.7 billion. So I can assume that the money raised through Timken was to reduce this debt and globally, you want to diversify further and that will benefit India over the longer term?

Obviously, if I want the global [indiscernible].

I'm just trying to match 1 plus 1, the debt level is so high globally. So that could have been reason for your diversification plan globally, which you're trying to play it out?

You are answering your -- raising your question and answering yourself, so I can't say anything. Only I can say that these are for strategic reasons, and I'm not [indiscernible] how they want to solve that debt. But 100%, this is for strategic reasons. We are focused on TIL. TIL remains on a growth path.

Our next question comes from the line of [indiscernible] with Bajaj Finserv.

Okay. Okay. This should be the last question as it is 4:15, yes, so [indiscernible].

Two questions I have. One is on the railway side.

Can you raise your handset? If it is already done, I can't hear you.

Sorry, am I audible?

Now better, yes.

Yes. So my question is on the railways. What is the kind of market opportunity that we are seeing? Any thumb rule for the bearing requirement for freight wagons and something like passenger coaches that goes into Vande Bharat?

So freight wagons are all on tapered roller bearings. So currently, we are using what we call as the Class C and we just migrated the rail use to a high-capacity class C for the dedicated freight corridor bearings to be used for higher XL, which is known as Class K, globally, Class G is used, so all this will follow exits on the Vande Bharat obviously, when they first 12 rake of freight we came to India, they were on Timken Bearings, Timken CTRB. And on the bar will keep on using the tapered roller bearings. So this opportunity is going to get better and bigger as the time comes.

Any value terms, the opportunity size?

These are going at a decent CAGR of 7%, 8%, 9%. So Indian revenues is budget allocation. It is through finance ministry. So a lot of things are out there. So I think it is following a pattern and will get better with every year.

Okay. And the CRB and SRB that you are planning to manufacture what is the incline and what is the market size in India currently?

The SRBs and CRBs are actually used for -- we supply tapers to the metal market, though we supply SRB, CRB but in different quantities. So it goes to almost all stationary equipment used, it is great in sugar industry, it is used in paper industry, it is used in cement industry a lot. It is used in material handling societies used in railways also. We did not supply that so far it is used on some of the motor [indiscernible], the part number, things like that. So it has a wide application. Generally, SRVs are used for [indiscernible] line. So there are a lot of such increment and the market is INR 1,000 crores market so and it's a stage -- India's per capita consumption of steel is still very less compared to other countries. So more and more steel will get produced in India consumed in India more and more cement gets produced and consumed in India. So obviously, all this will mean that this market will keep on growing. India still is an immature market. If you see 65% is mobile, which is two-wheeler, 3-wheeler, 4-wheeler, washing machine refrigerator. But if you see a mature market, generally, the stationary equipment only at is 50%. So this market is bound to grow.

Got it. Sir, last question, if I can squeeze in. Sir, out of this INR 2,800-odd crores of revenue in FY '23, what would be the portion that we have manufactured and what would be traded?

[ 70% ] is locally manufacture.

Sorry, I missed your number.

Yes. It is generally I think 65% to 70% locally manufactured 35% is traded into India, and we are exporting also roughly the same. So that is the ratio currently.

65% to 70% is locally manufactured. That is the number?

Yes. And depending on quarter-to-quarter, but that is roughly the overall number. Thank you. I think with that, we can say, thank you, everybody. Thanks a lot. I hope I have been able to answer some of your questions and a good day and God bless you.

Thank you. On behalf of Monarch Networth Capital, that concludes this conference. Thank you for joining us. You may now disconnect your lines.