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UBS Investment Research
Tube Investments of India
Growth and diversity
Market leader in diverse industries, initiate coverage with a Buy rating
We initiate coverage of Tube Investments of India (TI) with a Buy rating and a
price target of Rs197.00. Part of the Murugappa Group, TI is a diversified
company with products in the consumer, auto and infrastructure segments. It is a
market leader in most of its businesses—TI and Hero Cycles dominate the bicycle
market with a combined share of 75%, it has a 50% share of the precision tube
market, and a 64% share of the car doorframe market.
Well placed to benefit from growth in autos/infrastructure/consumption
We believe TI is well placed to benefit from growing auto demand (through its
tube/strip/doorframe/chain products) and capex for the infrastructure/power sector
(tubes/wagon sections). The company aims to increase its exposure to the
infrastructure sector through new products. Its bicycle business is a beneficiary of
rural growth/rising urban incomes.
Strong earnings CAGR, high ROCE businesses
We forecast a 55% EPS CAGR over FY10-12, driven by a 22% revenue CAGR
and rising margins. TI’s reported ROCE looks depressed due to investments on its
balance sheet. However, the adjusted FY11E ROCE of 25% looks attractive.
Valuation: price target of Rs197.00
We base our price target on a sum-of-the-parts methodology. We value the
businesses based on discounts to auto components and two-wheeler EV/EBITDA
multiples (we use 7-8x). TI also has significant holdings in Cholamandalam
Investment & Finance and in a JV with Mitsui in the general insurance business.
We ascribe a 50% holding company discount to these investments. The FY12E PE
of 12.7x looks expensive but, adjusted for the company’s holdings, we consider the
FY12E PE of 6.9x attractive.
Investment Thesis
We initiate coverage of Tube Investments of India (TI) with a Buy rating and
a price target of Rs197, 41% above the current share price. We believe the
current price reflects only TI’s bicycle, engineering product (tubes/strips),
and metal formed product (doorframes/wagon sections/chains) businesses.
We do not think it reflects the company’s investment holdings in
Cholamandalam Investment & Finance and in the general insurance business
(through a JV with Mitsui)—worth Rs46/share based on book value and
Rs106/share based on our forward valuation.
TI’s products cater to the consumer, auto and infrastructure segments, and it is
a market leader in most of its businesses. It is one of the largest players in the
bicycle industry (TI and Hero together control almost 75% of the market), and
has a 50% market share in the ‘specials’ category (premium and speciality
bicycles). It has a 50% market share for precision tubes (in the engineering
segment) and a 64% market share for car doorframes (in the metal formed
products segment).
We believe TI is well placed to benefit from growing auto demand (through
its tube/strip/doorframe/chain products) and significant capex plans in the
Indian infrastructure/power space (tubes/chains/wagon sections). Its exposure
to the bicycle business (including electric scooters (e-scooters) and fitness
equipment) make it a key beneficiary of rural prosperity and rising urban
incomes
We forecast a 55% EPS CAGR over FY10-12, driven by a 22% revenue
CAGR and rising margins. We forecast strong earnings growth, aided by
stable working capital, to drive leverage down from 0.9x in FY10 to 0.7x in
FY12. The company’s reported ROCE is depressed—FY10/FY11E ROCE at
13.7/17%—due to investments on its balance sheet. Adjusted for investments,
ROCE for FY11 looks attractive at 25%.
We derive our price target using a sum-of-the-parts (SOTP) methodology as
TI operates in three segments—bicycles/components, engineering, and metal
formed products. For metal formed products and engineering products, we
value the business based on a 10% discount to peer auto components’
EV/EBITDA multiples, because these two segments cater primarily to the
auto sector. For the bicycle division, we use discount to EV/EBITDA
multiples of two-wheeler companies. TI also has significant holdings in the
insurance business through a JV with Mitsui that focuses on the general
insurance segment) and a 59.3% stake in Cholamandalam Investment &
Finance. We ascribe a 50% holding company discount to these investments.
Key catalysts
Strong growth momentum: TI has a diversified revenue stream with
contributions from the bicycle, engineering (tubes/strips) and metal formed
product (doorframes/chains) businesses. We expect the company to continue
to benefit from our positive outlook for the auto industry, infrastructure and
consumption. We forecast a 55% EPS CAGR over FY10-12.
New products/markets: TI is focused on introducing new products in line
with evolving customer requirements and to capture different markets. New,
significantly improved e-scooter products, its focus on new
infrastructure/boiler segment products for the engineering segment and
industrial chains are key examples. We expect this to lead to higher growth,
which could act as a share price catalyst.
Risks
Raw materials: The company’s earnings are sensitive to volatility in prices
of some key inputs such as steel. A sharp increase in steel prices could
impact margins, although the company is in a position to pass on most of the
rise.
Competition: TI is exposed to competitive pressure in its engineering and
metal formed products businesses, especially in non-specialised products.
Cyclical risk: It has a leading position in its engineering and metal formed
products businesses but is significantly exposed to demand from the auto
industry. Autos represents 70% and 63% of revenue in its engineering and
metal formed products businesses, respectively. TI is thus exposed to
cyclicality in auto demand.
Macro slowdown: Each of the company’s businesses is exposed to overall
GDP growth and a slowdown in GDP growth would impact the company’s
growth and earnings
Valuation and basis for our price target
We use a SOTP methodology to value TI’s businesses. For metal formed products
and engineering products, we value the business based on peer auto components’
EV/EBITDA multiples, because these two segments cater primarily to the auto
sector. For the bicycle division, we use EV/EBITDA multiples of two-wheeler
companies. Although underlying demand drivers are not exactly the same for
two-wheelers, it is possible to compare the competitive scenario and product
usage drivers. Also, return ratios (ROCE and ROE) are similar (the FY10 ROCE
for TI’s bicycles business was 70%). TI also has significant holdings in the
insurance business (a JV with Mitsui focused on the general insurance business).
We ascribe a 50% holding company discount to these investments.
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