Timken India Ltd Management Discussions

As per the World Economic Outlook (WEO) released by the International Monetary Fund (IMF) in April 2024, the global economy is projected to experience gradual growth. It is forecasted that global economic growth will maintain a 3.2% rate in 2024 and 2025, akin to the growth rate observed in 2023. This growth rate, although steady, is lower than historical growth due to various factors like high borrowing costs, reduced fiscal support, lingering impacts of the COVID-19 pandemic, the conflict in Ukraine, sluggish productivity growth, and increased geoeconomic divisions. Furthermore, uncertainties surrounding global trade have heightened due to the ongoing crisis in the Red Sea region. Advanced economies are expected to see a growth uptick from 1.6% in 2023 to 1.7% in 2024 and 1.8% in 2025. The 2024 forecast has been revised upwards by 0.2% compared to earlier projections from January 2024, with an expansion in US growth balancing out a slight contraction in the euro area projected for 2025. For emerging markets and developing economies, growth is predicted to hold steady at 4.2% in both 2024 and 2025, with a slowdown in Asia offset by improved growth in the Middle East, Central Asia, and sub-Saharan Africa economies. (Source: IMF)

o Global Growth (%) o Global Outlook

The global economy is defying expectations and is showing surprising resilience in the face of recent challenges. Growth remains stable, and inflation, though high, is expected to gradually decline. Inflation is expected to decline from 6.8% in 2023 to 5.9% this year, with a further drop to 4.5% by 2025. Advanced economies are projected to reach their inflation targets sooner than emerging markets and developing economies. Global output and trade growth projections are the lowest in decades, raising worries about slower progress for middle and lower-income countries in catching up to developed nations. The overall expectation is for inflation to continue its downward trend, with long-term expectations remaining stable. This could pave the way for central banks in major developed economies to start reducing interest rates in the near-term. The biggest threat to this fragile stability comes from geopolitical tensions. Conflicts like the war in Ukraine and the Israeli-Palestinian clashes could trigger new price spikes. This scenario could force central banks to raise interest rates, potentially leading to a decrease in asset prices and persistent inflation, particularly in areas with tight labor markets.

o Bearing Market and Future Development

The global bearing market expanse is anticipated to grow at a CAGR of 9.5% from 2024 ($ 50.9 B) to 2030 (Source: https://www.grandviewresearch.com/industry-analysis/bearings-market). The roller bearings segment accounted for the largest revenue share of more than 45% in 2023. The automotive segment dominated the market and accounted for 49.0% of the market share. The high share of this segment can be attributed to high automotive production, globally. Also, the demand for vehicles with technologically advanced solutions is escalating, thus leading to a rise in vehicle manufacturing that necessitates instrumented products. The railway and aerospace segment are anticipated to emerge as the fastest-growing segment by 2030. This growth can be attributed to growing interest in travel activities, the growing need to renew aging fleets owing to stringent environmental legislation, and fuel price pressure coupled with the availability of improved ways to assist global and local transportation systems. Demand from railways is estimated to rise on account of accelerated railway construction in developing countries. Indian bearing industry is estimated to be ~ 3.5% of the overall global demand. OEM vs AM is estimated at 40:60 ratio.

India Economic Overview

o Current Scenario

The Indian economy expanded at a strong 8.4% in the third quarter of FY24. The growth was driven by strong tax revenue collections, increased government capital spending, firmness in domestic demand including rural demand, and robust growth in manufacturing and construction, the latter driven by infrastructure spending and real estate. The IMF estimates the GDP growth for India to remain consistent at 6.8% in 2024, 6.5% in 2025 and 2026 with the robustness reflecting an uptick in domestic demand and a rising working-age population. With a steady improvement in global economic outlook, stronger growth in exports is expected. India decisively withstood global headwinds in 2023 and is likely to continue as the worlds fastest-growing major economy on the back of growing demand, moderate inflation and stable interest rate regime (Source: IMF and Economic Times)

India’s Growth (%) o Outlook

As per IMF, Indias nominal GDP is now expected to surpass Japans in 2025 to become the worlds fourth-largest economy, a year earlier than the previous projection. Indias Core Inflation at 3.53% in January 2024 is at a 47-month low. It has fallen by 269 basis points from the recent peak in January 2023. This decline is attributed to disinflationary monetary policy and softening input prices. IMF has praised India for maintaining fiscal discipline in an election year, saying that the Indian economy is doing good and continues to be the worlds bright spot. Over the years, the Government of India has introduced many initiatives to strengthen the nations economy. Besides this, several governments flagship programmes, including Make in India, Start-up India, Digital India, the Smart City Mission, and the Atal Mission for Rejuvenation and Urban Transformation, is aimed at creating immense opportunities in India. Additionally, the interim budget 2024-25 raised the capex target to 11.11 lakh crores for infrastructure outlay; this is an increase from 10 lakh crores announced in 2023-24. The spend will spread across access-controlled highways, super-efficient ports, railways infrastructure including safer and faster trains and sustainable cities.

o Indian Automotive Industry

Indias Automotive Industry is set to touch new standards as it holds a strong position in the International heavy vehicles arena. The automobile sector accounts for 7.1% of Indias GDP and this is likely to increase further. With EV being the prime focus, India is currently on track to become the largest EV market by the year 2030 with a total investment opportunity of more than US$ 200 billion over the next 8-10 years. In addition, several initiatives by the Government of India such as the Automotive Mission Plan 2026, scrappage policy, and production-linked incentive scheme in the Indian market are expected to propel India to become one of the global leaders in the Passenger vehicle and Commercial vehicle markets by 2026. (Source: SIAM based on Automotive mission plan)

o Commercial Vehicles (LCV and M&HCV)

With the news of the General Elections kicking in the CV industry saw a very muted Q4 FY24 in terms of volumes and locked in a mere 1% Y-o-Y growth for FY 2024.

The domestic CV industry will likely see a decline by ~4-6% in FY 2025 owing to macroeconomic factors and high base effect.

The long-term positives that will keep the CV industry afloat would be the continued focus on infrastructure capex, construction, defense, and manufacturing activities along with favorable government policies.

o Tractor Market

The Tractor Industry ended the fiscal year with a decline of 7.4% over FY 2023 as the sales continued to dip post-Q2 FY 2023 as the El-Nino phenomenon led to a disturbed monsoon also distorting rural economies to a large extent. The market registered a CAGR of 0% from FY22 to FY24 with 8.7 Lakh units in sales. Top OEMs showed marginal growth from the previous year. The meteorological department forecasts normal monsoons for 2024 and with initiatives like Fasal Bhima Yojana and PMMSY receiving increased allocations, an uplift is expected in the rural economies thus seeing an improvement in agriculture activities thereby impacting sales numbers. The industry is expected to rise by a nominal 1-4% in FY 2025 yet falling short of the expectation to touch a million units.

o Railways

Indias Rail Infrastructure is undoubtedly recognized as one of the largest railway systems in the world. Each year, the Government aims to elevate the allocations towards the Indian Railways sector. In the Interim budget 2024-25, the Union Ministry of Railways has been allocated INR 2.55 lakh crore for the financial year 2024-25, up by 5.8% from last years allocation of INR 2.44 lakh crore. The Rail outlook for the year:

Coaches:

l As per Ministry of Railways coach production is set to cross 8100 units for FY25 and further expected to increase it to 8700 by FY26. ICF and other Rail Coach Factory plan to manufacture an additional 1230 high speed coaches. (Source: Indian Railways). The Centre announced an ambitious programme to upgrade 40000 standard rail coaches as part of retrofitting which is planned to be phased over 8-10 years with an pprox.. value of INR 4000 crores. (Source: Interim Budget 2024)

Metro:

l Bangalore Metro Rail Corporation Limited (BMRCL) has floated a tender for the preparation of a feasibility report on the extension of the metro line by 118 km. This extension is expected to part of phase III/IV signaling an increase in no of trains/rail traffic. BMRCL to source 96 coaches for phase II, 96 coaches for phase IIA and 126 coaches for phase IIB starting June25. (Source: Deccan Herald). Currently construction work is in progress for two new metro lines in Mumbai (Aqua Line 3) and Delhi (Phase IV) apart from the major cities the path breaking step is being taken with the rolling out of the countrys first rail based Regional Rapid Transit system (RRTS).

Passenger

l Passenger earnings are estimated to hit 73000 crores for FY 24 which is 28% above the previous financial period. (Source: SME Future)

l Indian Railways has surpassed the milestone of 1500 million tonnes in originating freight loading. This segment has observed prominent growth, with a total of 648 crores passengers who have travelled during FY24.

Locomotive:

l Indian Railways has recently released an order for 1200 Electric Locomotives of 9000 HP with 35 years full-service maintenance. This will help them improving haulage capacity, speed, scale, and utilization of rolling stocks on its freight corridors. The total order value is approximately Rs. 26,000 crores.

o Indian Industrial Industry

Industrial sector plays a significant role in Indian economy by contributing about 17% of the GDP. In the near future, India aims to have 25% of the economys output from manufacturing and achieve USD 1 trillion of manufacturing exports. India is also prepared to face global competition under Make in India programme. The impact of policy changes under the Make In India initiative and increased acceptance of the simplified tax regime amongst businesses of all sizes has provided the much desired boost to the manufacturing ecosystem in India. Industrial sector including mining and quarrying, electricity, and gas, has picked up pace whereas the services sector has witnessed a slight deceleration. On the output side, manufacturing has recorded the highest growth of 11.6% in 3QFY24 against a contraction of 4.8% in the same quarter of FY 2023. This is also corroborated by the healthy growth in Index of Industrial Production (IIP). (Source: EY-India Economic Pulse & Economic Times)

o Renewable Energy (Wind Energy)

The global wind industry experienced its most successful year on record in 2023, with installations increasing by 50% year on year. Despite the world being fully open following the global health crisis sparked by COVID-19, 2023 remained an unusual year due to the challenging macroeconomic environment, rising and ongoing hostilities, the Red Sea crisis and prolonged supply chain disruptions stemming back to the time of conflict in Ukraine. Total of 117 GW of new wind power installations, global cumulative wind power capacity has crossed the first 1 TW milestone in 2023, showing YoY growth of 13%. With a favorable political environment across the globe, GWEC Market Intelligence believes that 791 GW of new capacity is likely to be added in the next five years under current policies. This equals to 158 GW of new installations each year until 2028.

India currently ranks fourth globally in total wind installations with 45 GW of installed onshore wind capacity as of January 2024. India is positioned at second-largest wind market in the Asia-Pacific region, following China. In 2023, India commissioned over 2.8 GW of onshore wind capacity, the highest annual installation since 2017.As per National Electricity Plan, Indias installed wind capacity will likely reach approximately 73 GW by 2026-2027 and 122 GW by 2031-2032. (Source: GWEC)

o Growth Rates (on Y-o-Y basis in per cent)

Indias IIP surged by 5.7% in Feb-24 compared to same period last year marking its fastest annual growth rate in four months showing resilience amidst Economic trends, which is up from 3.8% in January, according to data from the Ministry of Statistics and Programme Implementation (MoSPI). Among the sectors, Manufacturing output witnessed a commendable year-on- year rise of 5% albeit slightly slower than the previous years growth rate of 5.9%. The combined Index of Eight Core Industries (ICI) increased by 6.7% (provisional) in February 2024 as compared to February 2023. The production of Coal, Natural Gas, Cement, Steel, Crude Oil, Electricity and Refinery Products recorded growth in February 2024. Conversely, Power Generation and Mining activity experienced robust growth, increasing by 7.5% and 8% respectively, indicating healthy momentum in these segments. Manufacturing PMI remained well above the expansionary zone for 31 months in a row, it has improved to 56.5 in January from 54.9 in December 2023. Growth of monthly IIP for capital goods have averaged to 7% during the period April to December 2023 over corresponding months in 2022. Growth in IIP for infrastructure and capital goods indicates well for capital formation.

Business Review

Your Companys active operations are in Engineered bearings, Industrial Motions, and related services business. Our parent organization, The Timken Company is a 125--year-old US-based organization with operations across 45 countries around the globe. The Company was founded in 1899 by Henry Timken, who received two patents on the design of a tapered roller bearing. Timken remains the worlds leading authority in tapered roller bearings and has leveraged that expertise to develop a full portfolio of industry-leading engineered bearings and industrial motion products Today, Timken is synonymous with innovation, cutting-edge technology and quality.

The Company sells its products and services to diverse customer base in India and Global customers through its fellow subsidiaries.

Our company has been capitalizing on favorable conditions in the Rail front end unit, which has shown strong demand and stability. This positive environment supports the effective utilization of our manufacturing facilities in Jamshedpur, leading to improved production efficiency and cost management. The Heavy Truck market, however, has faced challenges since last year and is expected to remain subdued in the short to medium term..

Chinas growth is slowing down, especially in Wind market. The current Wind market in India has good growth potential with more gearboxes getting exported out of India. and this is an excellent opportunity for us to leverage. During the year, the Company could further advance in Process and Distribution market. Our Process segment is well connected to the core sectors and your company is aware of the ongoing trends and is deeply entrenched through its direct and indirect sales and service model. As steel is becoming more attractive, our product offering is second to none and their consumption is significantly increasing. Industrial aftermarket is expected to grow and that give us good opportunity to further grow in terms of revenue. Your company has added 4 additional MILLTEC sites in FY2024 further strengthening its stronghold in the Metal market. Your company is in process of establishing its hold into the solar business in India through our US counterpart called Cone Drive and have started producing some slew drives at our Bharuch facility.

In line with the earlier announcement of investment of Rs 600 crore in Bharuch, Gujarat towards manufacturing of Spherical Roller Bearings (SRB) and Cylindrical Roller Bearings (CRB), your company work is going on as per schedule and the plant is expected to start operations during first quarter of 2025.

Your Company was the recipient of multiple awards and recognitions in the year including various CIIs circle competitions, Golden peacock award for energy efficiency, ET Sustainable Organisations 2023 award, and Best Supplier awards from two of our large customers.

Financial Statement Analysis

The analysis of major items of the Financial Statements is given below:

Profit after tax (PAT) stands at Rs 3,921 million for the financial year 2023-24 as compared to Rs 3,907 million in previous year, an increased by Rs 14 million.

Revenue from operations

The Company achieved all time high revenue of Rs 29,095 million during the financial year 2023-24 which is 3.7% higher compared to the previous year. Primarily contributed by increase in the domestic sales driven by strong market condition, reflected by double digit growth in major front-end units. The revenue was also impacted by decrease in export sales due to slowdown in the global market.

Other Income

Decrease in other income by Rs 124 million, due to previous years foreign currency gains and one-time Jharkhand incentive, absent in the current financial year, which is partially compensated by earnings from dividend and interest income from investments in mutual funds and fixed deposits.

Total expenses

Total expenses of Rs 24,261 million increased by 3.8% compared to the previous year. Increase in cost of material consumed 3.4% is in alignment with increase in revenue. Increase in employee cost by 3.1 %, on account of revision in salary and wages. Other expenses also increased by 6.8% majorly on account of structural volume increase and inflationary impact.

Tax Expenses

There is no change in effective tax rate of 25.16% as compared to previous year.

Earnings per share

Earnings per share for the financial year Rs 52.13 as compared to Rs 51.95 in the previous year.

Below is the discussion of major items in Companys Balance Sheet as at March 31, 2024. The below graph depicts major blocks of Balance Sheet:

Property, Plant and Equipment, Right-of-use assets, Investment Property and Capital work-in-progress

There is a movement of Rs 650 million compared to previous year, primarily on account of Bharuch SRB and CRB project under CWIP

and addition of new leases recognized as right-of-use assets, which was offset by depreciation.

Intangible Assets and Goodwill

The movement is majorly on account of amortization during the year for Intangible assets and there is no change in value of

Goodwill.

Inventories

Increase in inventories by Rs 972 million, which is in alignment with business volume and demand. The inventory turnover ratio stands at 2.78 as at 31 March, 2024.

Trade Receivables

Increase in trade receivables by Rs784 million compared to previous year due to higher revenue. The trade receivables turnover ratio stands at 4.74 as at 31March, 2024.

Cash and investments

The companys cash and cash equivalents, along with investments in mutual funds, up by 23.9%, Rs4,887 million compared to Rs 3,943 million in previous year fueled by effective cash management and increased internal accruals.

Other assets

Increase in other assets primarily comprises of capital advances of Rs1,358 million as compared to Rs209 million in the previous year.

Equity

Equity capital of Rs752 million remains same as previous year. During the year Timken Singapore PTE Limited (Holding Company), shareholding % decreased from 67.8% to 57.7%.

Trade Payables

Increase in trade payables by Rs 414 million compared to previous due to higher volume. The trade payables turnover ratio stands at 5.95 as at 31 March, 2024.

Key Financial Ratios

Parameters	For Year Ended 31 March, 2024	For Year Ended 31 March, 2023
Trade Receivables Turnover	4.74	5.04
Inventory Turnover	2.78	2.94
Interest coverage Ratio (times)	139	187
Current Ratio	3.91	3.77
Debt Equity Ratio	0.2%*	1%
Operating Profit Margin	18%	19%
Net Profit Margin	13%	14%
Return on Net Worth	16%	19%

* The ratio has decreased from 1% in March 2023 to 0.2% in March 2024 because of decrease in the borrowings. Also refer Note No. 41 of the Financial statements.

Strengths, Opportunities, Threats and Outlook

Strengths	Opportunities
O Strong base of Tapered Roller Bearings.	O Cross selling abilities by virtue of acquisitions of Industrial motion products.
O R&D capabilities of Timken Group with significant design and process innovation capability.	O Make use of available support from Government under Make in India initiatives.
O Custom application knowledge, and proactive service and engineering engagement with customer to provide energy and cost-effective solutions.	O Channel footprint strengthening to penetrate General MRO market and address regional gaps with value added services.
O De-risked revenue stream with cross industry presence.
	O Digitalization efforts to increase sales in Automotive aftermarket.
Threats	Outlook
O Ongoing Geo-Political concerns.	O Focus on localization and improvement in indigenous components sourcing in the up-coming years.
O Impact on Supply chain and Logistics due to issues like the Russia Ukraine war and Red Sea crisis.
	O Value proposition of all Timken Associated Brands.
O Any adverse modifications in the industrial environment or government policymaking affecting our customers demand.	O Risk mitigation by educating customers on importance of using genuine high-quality bearings procured from authorized distributors.
O Safety and operational risks posed by low quality counterfeit or spurious products.

Internal Control

The Company has designed and implemented internal control systems commensurate with the nature, size, and complexities of business operations. Internal control processes are designed to provide reasonable assurance towards the effectiveness and efficiency of its operations, reliability of financial reporting, compliance with applicable laws and regulations, prevention and detection of frauds & errors and safeguarding of its assets.

The Companys SAP ERP system infrastructure and checks are integral parts of the internal control system. Emphasis is placed on automated controls within the processes wherever possible to minimise deviations and exceptions.

The Company has well documented authorisation matrix covering all important operations of the Company.

The Company has formed a Risk Management Committee and has put in place an enterprise-wide risk management framework with an objective of timely identification of risks, assessment and evaluation of such risks in line with the overall business objectives or strategies and define adequate mitigation strategies to reduce the impact of risk exposure.

The Company is certified by independent third-party certifying agency for maintaining the risk management system as per ISO 31000:2018 which provides principles, a framework and a process for managing risk. All critical risk areas as identified by the Company are re-evaluated annually. During the course of year, appropriate changes were made to the risk register, considering internal and/or external changes.

Regular communication and awareness towards various policies and procedures are done to ensure common understanding by leveraging online and offline training sessions.

The Company has also prepared risk control matrix for each of its processes such as procure to pay, order to cash, hire to retire, treasury, fixed assets, inventory, manufacturing operations, etc.

The risk-based internal audit plan covering key business processes is approved by the Audit Committee. The Company uses services of independent audit firm to conduct audit of critical areas. The Audit Committee periodically reviews the adequacy and effectiveness of the Companys internal financial controls and the implementation of audit recommendations.

The adequacy of internal controls is examined by Statutory Auditors as well and the Company has not received any adverse comments from them on adequacy of the internal control system.

HR Front

Performance Management System

The Companys Performance Management System ensures that each employees goals are linked to Company goals & encourages active discussions round the year through a continuous evaluation process. The employees are required to update their achievements in the system & managers have to evaluate them from time to time & provide continuous feedback. The continuous feedback monitoring system helps the Company to stay agile & flexible.

Our Performance Management System gives equal weightage to Results & Competencies (Results 50% + Competencies 50% = Performance 100%). In the year 2023, our Performance Management system underwent major changes in terms of the rating scales used for review of Results & Competencies. The year end review process also had changes in accordance with the above. All employees are expected to have a development goal which helps them get better in their existing role or prepare for the next role. Initiatives like Diversity & Inclusion, Development Driven Leadership are driven through Corporate & are assigned to all Managers and they are accountable for the success of these initiatives.

Our year end discussions provide a platform to all Managers to provide inputs about the performance of their team members and evaluate them against their peers. The traditional distribution system has changed to a more flexible range & employees get into these categories based on their final calibrated ranking. Our merit & incentive pay is allocated based on this. The whole process is extremely transparent and fair.

Total Rewards

Our reward system follows a very data driven approach; the final output of the Performance Management system flows into our rewards process. The philosophy of Pay for Performance is backed by detailed market studies and benchmarking conducted every year. This year, the changes in Performance Management System led to the changes in yearend review process and the incentive payouts as well. This helps the Company to be competitive in the job market. The Company offers competitive benefits and long-term incentive plans to Senior Management.

The Company also offers an array of wellness programs under the umbrella of Corporate Wellness for all employees. The Corporate Wellness program offers health related sessions, health checks etc. which leads to employees having an active & healthy life. The Company also reimburses the annual health check cost for employees once a year.

Continued Learning

Continuous learning is one of the key objectives of the Company. In Timken we follow the 70-20-10 Model for Development where 70% of the learning comes from experiential learning, 20% from social learning & 10% from formal training. There is a thorough training need analysis done across the organization & a training calendar is rolled out based on common needs across the board. Learning & Development initiatives of the year included trainings on topics like Business Communication, Project Management skills, Finance for Non-Finance, Team Management skills, developing Leadership Mindset etc. Emphasis on technical trainings continued with programs like Level 1, Technical crash course etc.

Leveraging of Timken University which is the Companys online learning platform continued. Employees could either self-assign the courses available or Managers would nominate them. Some of the mandatory programs related to information security, POSH and other topics were assigned to all employees.

Resource Groups

Employee Resource Groups (ERGs) play a major role in employee engagement initiatives at Timken. Apart from the 2 active ERGs i.e.,

Womens International Network (WIN) & Young Professionals Network (YPN), we also launched the 3 ERG by name Multicultural Association of Professionals (MAP) in 2023. All the 3 ERGs have their Vision & Mission and operate with goals and objectives that are aligned to Company goals.

The ideology and concept of these groups are on similar lines of what the Global teams offer. The common objectives of all these resource groups are to foster professional development of employees.

The resource groups engage employees in different events aligned to their objectives. The core team of each resource group is responsible for executing the events for the year. Every year WIN starts off their calendar of events with the International Womens Day celebration and focusses on providing opportunities for employees to attend different events. WIN Santhe, which is a fund-raising event, aims at generating some funds & we tie up with Jeevodaya an NGO supporting upliftment of distressed women in the society. Networking, Diversity & Inclusion are some of the key objectives of these resource groups, and they consciously drive events around these topics. MAP will kickstart their calendar of events in 2024. All the 3 ERGs will collaborate on any common events like CSR, Trek etc.

l Cautionary Statement

Certain statements made in this Report describing industry structure and development, business outlook and opportunities may be “forward looking statement” within the meaning of applicable Securities law and Regulations. Actual results could materially differ from those expressed or implied. Important factors that could make difference to the Companys operations include economic conditions affecting demand/supply and price conditions in the domestic and overseas markets in which the Company operates, changes in the Government regulations, tax laws and other statues and incidental factors.

For and on behalf of the Board of Directors

	Sd/-
	Sanjay Koul
Date: 1 July, 2024	Chairman & Managing Director
Place: Bengaluru	DIN: 05159352