Timken India Limited (522113) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Timken India Q3 FY '24 Earnings Conference Call, hosted by Avendus Spark. This conference call may contain forward-looking statements about the company, which are based on beliefs, opinion and expectations of the company as on the date of this call. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Mukesh Saraf from Avendus Spark. Thank you, and over to you, sir.

Thank you, Yousuf. Good afternoon, Mukesh Saraf here from Avendus Spark. Appreciate everybody logging in. I'm pleased to host Mr. Sanjay Koul, Chairman and Managing Director of Timken India; and Mr. Avishrant Keshava, CFO and Whole-Time Director of Timken India. We'll start with some brief opening remarks from Mr. Koul, and then follow it up with the Q&A. Over to you, sir.

Okay. Thanks, Mukesh. So I will give a little bit of a commentary which might help with the questions itself. Our financial performance for the Q3 '23-'24 versus Q2 '23-'24, the immediate the previous quarter. And our sales was around INR 612 crores, which was almost down by 10% compared to the previous quarter. And this is only the operational sales, it does not have any other gains in it. So intercompany sales, actually the company is what we do, the exports, et cetera, that contracted by 6.6% compared to the previous quarter, and this was the external market conditions, global economic factors, et cetera. Domestic sales, though rail went up, but overall, there was a decline, which was in other FEUs, like trucks and in off-highway trucks. Other margin compared to the previous quarter was down by almost 3.2%, major reason was obviously unfavorable product mix. And then we could not leverage the volume. So the cost versus the volume leverage. So we lost almost 2.2% on that. And EBITDA was at 18.5% compared to immediate previous quarter was down 2.8%, and this is in line with the same unfavorable mix and not leveraging the volume. And then if you come to Q3 '23-'24 compared to Q3 '22-'23, our sales was slightly up. In Q3 '22-'23, we did INR 609 crores, we did INR 612 crores sales, so up by almost 45 basis points, slightly up. However, the intercompany was a contraction during compared to the same quarter last year by 12%, and that is global economical factors. And domestic sales compared to that quarter last year were up by 13%. PBT was at 14.9%, which was down 70 basis points to the quarter last year. EBITDA was at 18.5%, down 90 basis points compared to the same time. And last year, compared to that quarter, we had some currency gains, other income. So that was not in this quarter. And then if you see 9 months performance 2024 versus '22-'23, our sales are up slightly. We are at INR 2,011 crores, which is up by 38 basis points. However, the exports are down in this period of 9 months by 10%. So you can see that export down by 10% and our domestic sales in this 9 to 9 month was up by 10%. PBT margin at 16.8%, down 2.5%. Last year, we got a currency gain and onetime Jharkhand incentive, which was not there. And then there was this a little bit of unfavorable product mix. And EBITDA stood 9 months to 9 months, 20% versus 22%. So that is, in general, the summation of these quarter comparison. And I'm now okay to take the questions.

[Operator Instructions] We have our first question from the line of Mr. Mukesh Saraf from Avendus Spark.

Yes, sir, as the question queue builds, I'll just start off with some of the, I think, more hygiene questions. So obviously, exports is one important area. And I think last quarter also, you had commented that things are weak. But I think the expectation was that things would start kind of showing some signs of improvement. But it seems like, again, sequential decline. So could you give us some more color how much is more of an inventory correction? How much is the actual end market demand weakness? And how should we look at exports going forward given that we have a lot of -- I mean, the parent as such is obviously continue to look at Timken India as very favorably, so could you kind of give us more sense there?

Yes. In general, because of this Red Sea issue, so there is a little bit of lower demand so because now more inventory will be on water. So there will be lower demand for some time, which is a short-term kind of corrective demand. But overall, in U.S., the markets are, especially the areas where we are working in export is the heavy truck market and other is rail. The rail market is pretty much okay. The rail market, if you see today, Brazil is booming, really booming. And North America is also not that bad. Indian market is booming. Indonesia rail also, you have PT KAI, et cetera, companies like that are also not bad. So on one side, as you know, that 50% of our exports is rail and 50% is the smaller bearing. The rail is pretty much a robust condition. The demand in Brazil is very good and America is also pretty much okay. But on the heavy truck, the market is not really up and running. So there is this discussion that the H2 in U.S. might look better. And there is also a camp saying that it might revive in '25, so that [ we can't do ]. But what I see currently is that the rail order books for exports, the markets are pretty much okay. India is also pretty much -- domestic side is pretty much okay. If not exactly the heavy truck market, the rest of the stuff, including rail is okay. The wind market in China is down. So that is a piece, which also kind of connects to the global stuff. China is down. So it has an impact of global supply chain, if not directly to us, but there are impacts, et cetera, et cetera. So all said and done, I would say that export from rail pretty much okay. Heavy truck still hazy. Hopefully, it comes back in the second half of this year. First half doesn't look to be okay. And Indian market is, I would say, pretty much okay.

Right. Got that, sir. I think we have questions in the queue. We will go to them and be back.

Next question is from the line of Mr. Chintan Chheda from Quest Investment Advisors Private Limited.

So sir, I have got one question. Basically, from this China Plus One kind of opportunity, right, so in the North American Railroad segment, what is the opportunity from a strategic point of view over the next 3 to 5 years, are we seeing?

So one thing I can tell you, I lived in China for 5-odd years, and we have the sister company, The Timken company has footprints in China. And we are a North American-owned majority stake company. So all said and done, Americans are looking at China Plus One seriously. So this mitigation of global supply chains are heavily inward, but these supply chains were very much dependent on China. And this is a huge work. It is not an overnight thing, but we can already see that the impacts are slowly coming. And now coming back to Timken. As you know that Timken has good footprints in China, and they are seriously looking at a strategic direction of risk mitigation of supply chains. And that is obviously not an overnight thing. We are putting the SRB plant, which I call the Phase 1. After we complete the Phase 1, then we'll discuss and see what will happen to Phase 2. So the work in progress is happening on not only for Timken, but most of the companies, which I see also as part of the American Chamber of Commerce. China Plus One is seriously taking shape. Now the Chinese companies are also not sitting idle. Chinese companies are seeing that China Plus One is happening. So you see the Chinese companies are investing in ASEAN. They are investing in India. They are -- though India they might not be major takers, but still they are trying hard. Like I will say that Nanjing High Speed -- largest gear -- wind gear making company is setting up shop in India in Chennai then there's SANY. So Chinese companies are also going out and setting up shop in backyard of North America as well. So while China Plus One is happening, China itself is risk mitigating themselves by putting investments outside China. And their plants these days are not loaded. So they are doing their best to put plants in Indonesia, in Vietnam. They are trying their best to risk mitigate themselves by spreading out their investments outside China. So this is an interesting juncture. What I can say is that India is sitting on a very nice point of time because of the fact that, a, India investment -- India, as investing is going to happen. The infra buildup is happening. The rail has to go a long way. And similarly the infrastructure connected to the marine, connected to airports, all this will keep on coming. And then India is destined to take a nice pie, a piece on this China Plus One. Obviously, Government of India will have to do their best that we will become very tax friendly and all those things. Continue the way it has been happening in the last 10 years. I think India will see the next 10 years as the best period where nobody can stop that unless something catastrophic happens other way. So Timken is also on the China Plus One. I can say that we have a heavy investment on China. We are committed to China, that is the Timken company. It's a local market. It's a huge installed base. But at the same time, given the global supply chain risk mitigation, so Timken company is also working on that.

Next question is from the line of Abhishek from DSP.

Sir, just in terms of the revenue mix for the quarter, would you be able to give some light or maybe on an YTD basis in terms of railways, process, exports, mobile and distribution, any thoughts, sir?

Yes, sure. So if you see the breakup of our last quarter, which was Q3 '23-'24, out of the total pie, 18% was rail, and mobile, as we call it, which covers both off-highway and heavy truck was 22%, distribution is 17% and process industry is 21%, and our exports was 20%. So that was the percentage breakup.

Okay. So sir, 2 key segments, if I look at both exports and distribution, which inherently should be higher gross margin segment for you, both are down on a Q-on-Q basis. Is that the reason for lower profitability in the current quarter, any thoughts?

So the -- if I compare the PBT margin of Q3 versus Q2, same financial year, 1% was attributed to the product mix and export. That was certainly a 1% round there and another 2% went to the -- leverage your fixed cost and the plants are not loaded well. And in India, you can't flex the labor, you can't lay them off. So that 2% loss is due to the suboptimal leverage in cost for significant volume reduction.

Got it. That is very helpful. Sir, just in terms of these 5 segments, Railways, you spoke about that there is a strong demand which is kind of coming through both in India as well as overseas. So how should one look at this piece? Is it like more like a teens growth that one should expect in the domestic railway business given the overall outlay that we are seeing and there's so much of new trains which are coming up. Any thoughts, sir, on that?

Yes, rail demand, if you divide the rail demand, domestic is freight. It is -- obviously freight is growing. The passenger is also growing, which is the Vande Bharat or the fast trains. And then the metros are also growing. Metro is a very small portion of it. So it is growing up. Not that many locomotives, but still -- but the major chunk of Indian Railways domestic is freight followed by the passengers. So that is certainly growing. So the consumption is growing there, though it is not at a very high CAGR, but it's growing. Every month is -- every year is better than the previous year, if you would like it that way. On the export side, the freight in Brazil is booming currently, as I said earlier. So obviously, they need freight bearings as well. So that gives a good capacity utilization for rail assets for us here in Jamshedpur, which means that you can leverage volume further. And as you guys know, that bearings are very CapEx intensive. Fixed cost is there. We have put new lines. Depreciation is there. And if you can leverage these capacities well, they certainly help us greatly on the cost. And then the back-end of the supply chain also, if you are sourcing more and more of the same part numbers, obviously that helps a little bit more on the cost side. So more consumption of the rail lines due to a cost advantage. And similarly, when you don't leverage them, like on our truck side, if you don't leverage them, same thing works the other way around is that you have assets which are dependent on volume. And you can't get the gain as the volume might be low and that also impacts the previous supply chain as forging is a heavy duty equipment making process where the setups are larger. And if you run smaller batch sizes, the waste for a 5,000 piece run and a 50,000 piece run is almost similar, so the back end of the supply chain has those impacts.

Okay. Sir, just in terms of exports, you did mention briefly, but would it be fair to assume 50% is trucks and 50% would be railways for the exports piece?

Yes, roughly, that is -- that has been the rough, some 45%, 55%, but overall, 50-50. And currently, rail markets are tracking more. We have installed one more double cup line, which is the outer line so that we can produce a little bit more. So we are working, as I speak, 6 days, 3 shifts and also installing one more line on that.

Okay. So 50% of the export market is growing for you. It's the rest 50% which has seen a sharp decline and the overall export pie has come down from 35% to 20%. That's the way to look at it.

That is right. That is absolutely right. And the truck market, there is a big camp saying that H2 this year, that is American H2 that is calendar year should start picking up. So let us hope if it picks up and then that leverage also gets gained. In the meantime, Indian truck market, you guys know better than me. So we'll have to see how the Indian truck market also picks up or not picks up as we come closer to the election time.

So sir, whenever this overseas CV, it will be largely classic trucks which will drive growth for the export market?

Yes.

So your expectation is whenever it comes back, it should come back pretty sharp because the decline also has been sharp.

That is the beauty of these part of the demand. It falls like a rock and come back like a Gujarati kite, kite means [ Patang ] not the animal kite.

Sir, the other aspect is also on the process part of it. Now what I understand is you're a little more on the heavier on the steel side of the business and that's a piece which we see a lot of capacity addition happening. So how should one look at this process part of the industry and [ any thoughts on that ]?

Yes. So largely process is connected to core sectors, so steel, which is metal making, cement and power generation. Now if we talk to steel, so steel is becoming more attractive. Last year also, obviously, when the capacity is announced, it is a 2-, 3-year term to get the installed base coming then it is getting installed. So this is happening as we talked pretty nicely, more steel installed, I mean more bearings and which means more steel getting produced and further more consumption of bearing taking place. And so we have a product offering in the metal industry, which is second to none. So obviously, that helps because as most of these application on papers have been designed generally around Timken technology. So we are looking pretty much bullish on the metal side. And we are the only company in India which are running 25 shops inside the steel companies. You name the steelmaker in India, we're inside their shops. And what we do is that we ourselves mount the bearings, we choke, dechoke and maintain those so that the customers also get with better yield on the life of the bearing. So we know the trends. So we know the mills, and we are deeply influenced through the service model as well. So steel is pretty good. On the energy side, as we are also part of [ pulverizer ] business. But as the solar business is picking up in India, and now you see that in India, especially Tata Solar and FTH, now they are coming up with these solar panels which will rotate. So Timken India has already started working on it through our company in U.S. called Cone Drive, which also owns a company called H-Fang in China. So we have started producing some slew drives ourselves in Bharuch, still at a very nascent stage. These are small components. But these are effectively helping the solar panels to move around as per the direction of the sun. And wind as the Government of India is really bullish on putting up wind mills, the target they have set for themselves is pretty heavy. And we see that local wind market, currently, the wind market in India was more gear-boxes is getting exported out of ZF, Siemens, et cetera. Now there is a very nice chance driven by Government of India and Adani Green and all these guys are putting up and in the process of putting windmills in Saurashtra, in Kutch area, et cetera. So wind also looks pretty good. The metal looks also good. And then on the cement side, we do have the product offerings, but they are all imported. So as soon as we complete our Bharuch plants by the end of this year, then we'll start producing SRB of certain range. It won't be the whole hog of CRB of the range, which will start catering into the cement business or paper business or the sugar business as well. So we are looking very happy with the steel market currently with the investments coming up and with our knowledge of steel should help us on this solar, which is a new thing. Only Timken which is a bearing company will have this product offering. So we have started doing that. It is small, but it can become big as China Plus One issue of tariffs, so importing those cylinders out of China into U.S. versus importing them out of India is another sunrise market. We'll see as it comes into being. Can't predict to what will happen, but the direction is being set towards that area. And then in the local wind market of 3 megawatt, 5 megawatt, Adani Power and companies like that starts getting pretty good on that. So that would be another sunrise in coming months and years.

Sir, just one question on the solar part of it. You are developing the product for the rotating solar panels towards the sun and maybe those bearings and other things will be required. Does the -- does your peer already have a product or it is a new product innovation that will happen...

Peer has this product for last 30 years.

Okay. So peers have the product, you have to develop it.

So let me qualify the statement. Peer has taken over a company called Cone Drive, which has this product for the last 30 years.

Got it. Okay. Fair. That's helpful. Sir, just lastly on the distribution part of the business. How are you focusing on that? Because that's again a very lucrative business in our understanding, how should one look at that aspect?

So if you see distribution -- now let us divide distribution into 2 pieces. One is the industrial distribution and the other is the auto distribution. The auto distribution is the heavy truck bearing change, which is mostly largely wheel lend. Wheel lend bearing gets changed, different opinion, generally get -- does not get changed. So that is one piece of distribution, which has its growth, but we see that our premium competitors are leveraging their brand, and they are using in the auto aftermarket. They are getting into windshield, wipers, oils and things like that. So that is one part of distribution, which we are limiting to bearings and grease. We've been selling grease in India under our chemistry for last 20 years. So we are limiting that to our bearings and to grease and adding a related party to that, but not going to be extreme of producing windshield cleaners and things like that. But on the industrial side, we've been growing CAGR double digit. Obviously, steel is an important piece of that, which is a strong MRO requirement. But beyond steel, we are now getting into MRO of the general industry, where we were lacking, a, product offering; and b, the reach. So we are augmenting our reach and the product offering as well importing from our other companies of Timken and enhancing our reach into towns and areas where we are getting consumed. So general industry is a sunrise area for us, and we are investing heavily into our distribution channels to get into those areas.

Next question is from the line of Kunal Vora from White Whale Partners.

I'd love to get some more color on the railway side of things, so you see the wagon manufacturers as well...

I'm sorry, I cannot hear you.

Is this better?

A little better, yes.

Yes. So I wanted to get some color on the railway side of the business. You see a lot of the wagon manufacturers as well as some of the competitors reported very robust kind of growth numbers here. So can you just give us some color on how you're seeing our business grow and whether we are losing any market share to them?

Yes. Okay. So on the rail side, so on the freight side, we are the leading player in the Indian rail freight market. And when we say freight this freight over the years have changed itself a little bit. One is that once upon a time, Railway Board used to buy it all themselves and then what they used to call it as a free supply given to the wagon builders. So they have changed it. Now they are asking the wagon builders who quote for the wagon to buy everything themselves. So this is a wagon builder now on one side, and they have heavy warranty, guarantee commitments back to the Indian Railways. So that is one piece of it. And second is that these wagons when purchased by the Indian Railways go into circulation, then every 4 years they go through what we call as the POH, et cetera, et cetera. That means that all the bearings will get stripped and then they will have to be -- if they're old, they started new bearing coming. So there are 2 kind of buy on freight. One is we buy from the Indian workshops, which is done by the Railway Board after consolidation. And then there is also now the buy by the wagon builders. So wagon builders have to rely very, very well on very established players because of the fact that if they have one derailment, Government of India, Indian Railways will really wipe their pockets away because of the heavy warranty clauses they have. So Timken is an established player. We do all our mountings on these wagons ourselves. We ensure high quality. We ensure mounting is done well, and we have a relationship with the leading wagon builders like Titagarh, Texmaco, Jupiter, Braithwaite, et cetera for a number of decades. Our teams are well entrenched. Timken has the right capacity in place, and we have developed the supply chains over the years. And we are bringing in new technology in terms of sealing solutions, et cetera, et cetera. And then Government of India on the freight side is also slowly working on dedicated freight corridors, Class K, which is a little bit of heavier bearing than the normal freight bearing. So we are well entrenched in this game. We are the leading suppliers, and we had -- the competition was always there. It is not that competition was not there. It was there always and we remain always there. And we are using technology to make sure that we remain ahead of the game. We are also using special maintenance practices, which ensure that the Indian Railways get better uptime on these bearings. And then we are also doing the refurbishment of bearings, which means that when they strip the bearing off, we will -- we do the refurbishment, and we are also looking at getting more nearer to the workshop. We already have a footprint -- heavy footprint in Jamshedpur, and we are building in other cities in India as well. So freight, we have a strong position and we intend to keep that position well using technology, using service, using our brand equity with these wagon builders and the relationship as well. So that is where the freight is. And freight is obviously -- Government of India, Indian Railways had 300,000 wagons on circulation. There is the rolling stock needs to get changed at some point of time. They need to put more wagons on dedicated freight corridor, which is Class K. And this market, as India produces more and more, so you can understand that with our roads being congested, rail freight business should be better, though roads are coming up very well as well. So I think freight business is going to remain nice and long. We are nowhere close to what China used to consume or still is consuming. The biggest market of rail freight is America followed by China, Russia. India is the fourth largest market of rail freight business. So if we have to -- if our economy becomes 10 trillion, so obviously you can understand that 10 trillion and out of which 25% is manufacturing, so 2.5 trillion worth of goods to be transported. So a lot of bearings will get consumed on the freight side.

What would be our market share railway side?

More than 50% currently.

Sorry?

More than 50% currently.

Okay. And so fair to say that we're not losing any market share?

Sorry.

Is it fair to say that we're not losing any market share?

No, we are gaining market share.

We're gaining market share?

That is right.

So is there a lag higher now than it was before in terms of when the wagon manufacturers kind of win the orders?