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Tube Investments of India has well-established businesses with dominant market
shares that leverage on auto consumption and a rising trend of discretionary
spending in the country. We initiate coverage of the stock with a BUY rating and a
price target of INR184, based on the company’s strong earnings momentum and
what we see as attractive valuations.
Catalysts
The 20%-plus EPS CAGR we forecast over the next three years could well see the
stock outperform the broader market.
Anchor themes
The current auto boom in India is likely to continue, owing to under-penetration and
a likely increase in discretionary spending on automobiles.
The light at the end of the tube
Leveraged to the auto consumption boom in India
We believe Tube Investments Of India (TI) is leveraged to growing
and sustainable auto consumption demand in India, which is fuelled
by under-penetration and rising discretionary spending. TI is the
second-largest producer of bicycles in India and has dominant market
share in precision tubes and metal-formed products that are used in
the auto industry. The company’s insurance business is also directly
linked to the increasing spend by Indians on general insurance.
Good quality and high ROCE businesses
In our view, the company has a strong management and competitive
position, and recorded an ROCE of 30% in 1H FY11, after adjusting
for investments in financial services. Also, other financial parameters
such as debt-equity and free cashflow (FCF) generation are likely to
improve, as per our estimates.
We expect strong EPS growth
We expect the current strong business momentum to continue, which
is likely to translate into an EPS CAGR of 37% in FY10-13F. The
stock is trading at a P/E of 15.4x one-year forward EPS, which
becomes what we see as an attractive P/E of 11x FY12F EPS, after
adjusting for investments in insurance and financial services.
Initiate with a BUY and price target of INR184
We value the company based on a sum-of-the-parts methodology to
arrive at our price target of INR184, which implies 27.9% potential
upside. We initiate coverage of the stock with a BUY based on TI’s
strong earnings momentum and attractive valuations. The divestment
of its financial services business (no timeline from management) could
be a potential re-rating trigger.
Leverage on Auto consumption demand in India
The company’s Bicycles, Engineering and Metal Forms businesses leverage on the
consumption boom in India, which is being driven by under-penetration, rising
discretionary spending and changing demographic profiles in India.
Based on industry studies (Ernst & Young), the Indian auto market is estimated to
clock the fastest compounded annual growth rate between 2009 and 2020, more than
double that of China and the triad of North America, Europe and Japan. According to
Ernst & Young, India is expected to record a CAGR of 14% during 2009-20, compared
with China at 6%, other emerging markets at 6% (which includes BRIC nations) and
the triad of North America/Europe/Japan at 4%.
The main reasons for the expected growth are:
As incomes rise, people have a tendency to rely more and more on personal
vehicles;
Rapid growth in vehicle financing;
The availability of a wider range of products, especially low-cost cars such as the
Nano and other global cars that have been made suitable for Indian conditions.
Dominant market share in all businesses
The company has a strong competitive position and dominant market shares in all its
three main businesses — Bicycles, Engineering and Metal Formed Products.
In Bicycles, the company has the second-largest market share of almost 40%, just
behind the Hero group, which has a market share of around 47%. Similarly, in the
precision welded tubes (CDW segment), it has a market share of 40%; in automotive
chains its market share is 40%, and in metal-formed car doorframes market share is
almost 60%.
All the three business are profitable, free cashflow generating, with an average ROCE
of over 20%.
The company has also entered new fast-growing segments such as railways (INR1bn
in revenue in FY10), and industrial chains, which is likely to reduce its overdependence
(more than 60% in engineering and the metal-formed businesses) on the
auto-sector.
Strong EPS growth should drive valuations
We estimate the company’s revenue will grow at a CAGR of 19% over the next three
years (FY10-13F) on the back of growth in user industries such as autos and railways.
This will likely result in an EPS CAGR of 37% during the same period, led by improving
margins on account of operating efficiencies.
We also expect other financial parameters to improve: net debt-equity is likely to go
down to around 66% from FY13F and free cashflow (FCF) to INR2,279mn by FY13F;
adjusted ROCE (excluding its investments in financial services) will likely to go up to
34% from FY13F.
Valuation
We have valued the company based on a sum-of-the-parts valuation:
One-year forward P/E multiple of 13.5x on the stand alone one-year forward EPS of
INR11.08 yields a value of INR150/share for the core business;
Its 60% stake in Cholamandalam Finance is valued at INR34/share based on a
40% holding discount;
At our price target of INR184, the target P/E ratio comes to 16.1x, which is in line
with the past six months’ average P/E of 16.0x observed for the stock;
Likewise, the target EV/EBITDA is 7x which is a 20% discount to the average for
the past five years (see Exhibit below);
The one-year forward P/E multiple of 13.5x for the standalone business is justified
as it has high-quality and high ROCE bicycle business and engineering & metalform
businesses, where the company has a dominant market share.
We have not assigned any value to the general insurance business, in which the
company holds a 74% stake and had a market share of 2.3% in FY10. We believe the
financial performance of the insurance industry in India is improving, as both large
PSU players as well as new entrants have stopped price under-cutting. Also, the
company has exited the loss-making health insurance segment.
In our view, the divestment of its financial services business could be a substantial
trigger for the stock, though the company has issued no timeline.
Risks to our investment view
Slowdown in GDP growth in India
Growth of the auto industry in India largely depends on GDP growth; hence, any
slowdown in GDP growth may have a negative impact on the company’s prospects.
Increase in interest rates in India
The auto-industry in India is sensitive to interest rates; hence, an increase in interest
rates could impair the growth of the company.
The company is mainly in three core business
The company is into three businesses on a standalone basis: the Bicycle business,
Engineering business and Metal Formed products business. The company has
subsidiaries in two other businesses: Cholamandalam Investment & Finance, which is
into financial services and Cholamandalam (MS) General Insurance, which is in the
insurance business.
Bicycles business
The company’s bicycle business is on a steady growth track, with a high ROCE
(>100% in 1H FY11), is a direct play on increasing discretionary expenditure by households
in India. The company has the second-largest market share (~40%) in a
consolidated industry, which comprises two segments — standard (60% of total) and
‘specials’ (40% of total). The specials sell into the high-end bikes segment, which is
growing at 10% pa, while the industry growth for standards is not as pronounced.
In the bicycles business, the company has two broad brand categories, namely BSA
and Hercules, which are targeted at the specials and the standard segments,
respectively. Both these brands are well recognised by local consumers and vintage
cycle fans will recognise these storied names as well.
The company has transformed its bicycles business over the past three to four years
and taken the lead in growing awareness about the benefits of cycling. This has been
done by:
Launching products in each segment such as children, women and girls (SLR and
captain), mountain bikes and distributing high-end bikes;
Creating awareness about cycling by organising events such as ‘cyclethons’ and
other cycling events (400-500 events per year) across the country;
Hiring a sales team of 150 to 200 sales persons and creating multi-location
manufacturing facilities in Coimbatore, Nasik and Noida to reduce lead times and
transportation costs;
Creating a chain of distributors, retailers and exclusive stores (which also sell other
accessories and fitness equipment);
Creating a hub of vendors near each manufacturing location and outsourcing most
items to those vendors, apart from finishing, and painting.
Valuation methodology
TI’s all three businesses — Metal-Formed, Engineering and Bicycles are consolidated
industries, where the company has dominant market shares. Also, the combined
ROCE of these businesses, as of 1H FY11, is 30%, which is likely to continue, in our
estimates.
We have valued the company based on a sum-of-the-parts methodology:
One-year forward P/E multiple of 13.5x on a stand-alone one-year forward EPS of
INR11.08 gives a value of INR150/share.
We have valued its 60% stake in Cholamandalam Finance at INR34 per share,
based on 40% holding discount.
At our price target of INR184, the target P/E ratio comes to 16.1x, which is in line with
recent past (six months) average P/E of 16.0x observed for the stock.
Similarly, the target EV/EBITDA comes to 7x, which is a 20% discount to the average
for the past five years.
The one-year forward P/E multiple of 13.5x for the standalone business is justified as
these are high-quality and high ROCE businesses where the company has dominant
market shares.
This is also in line with the average for a comparable auto and auto-comp universe.
This also translates into one-year forward EV/EBIDTA of 7x, in line with the average of
our universe.
We haven’t assigned any value to the general insurance business, in which the
company holds a 74% stake and held a market share of 2.3% in FY10. We believe the
financial parameters of this industry are improving, as both large PSU players and new
entrants have stopped price under-cutting. Also, the company has exited the lossmaking
health insurance segment.
In our view, the divestment of its financial services business could be a potential
trigger for the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Action
Tube Investments of India has well-established businesses with dominant market
shares that leverage on auto consumption and a rising trend of discretionary
spending in the country. We initiate coverage of the stock with a BUY rating and a
price target of INR184, based on the company’s strong earnings momentum and
what we see as attractive valuations.
Catalysts
The 20%-plus EPS CAGR we forecast over the next three years could well see the
stock outperform the broader market.
Anchor themes
The current auto boom in India is likely to continue, owing to under-penetration and
a likely increase in discretionary spending on automobiles.
The light at the end of the tube
Leveraged to the auto consumption boom in India
We believe Tube Investments Of India (TI) is leveraged to growing
and sustainable auto consumption demand in India, which is fuelled
by under-penetration and rising discretionary spending. TI is the
second-largest producer of bicycles in India and has dominant market
share in precision tubes and metal-formed products that are used in
the auto industry. The company’s insurance business is also directly
linked to the increasing spend by Indians on general insurance.
Good quality and high ROCE businesses
In our view, the company has a strong management and competitive
position, and recorded an ROCE of 30% in 1H FY11, after adjusting
for investments in financial services. Also, other financial parameters
such as debt-equity and free cashflow (FCF) generation are likely to
improve, as per our estimates.
We expect strong EPS growth
We expect the current strong business momentum to continue, which
is likely to translate into an EPS CAGR of 37% in FY10-13F. The
stock is trading at a P/E of 15.4x one-year forward EPS, which
becomes what we see as an attractive P/E of 11x FY12F EPS, after
adjusting for investments in insurance and financial services.
Initiate with a BUY and price target of INR184
We value the company based on a sum-of-the-parts methodology to
arrive at our price target of INR184, which implies 27.9% potential
upside. We initiate coverage of the stock with a BUY based on TI’s
strong earnings momentum and attractive valuations. The divestment
of its financial services business (no timeline from management) could
be a potential re-rating trigger.
Leverage on Auto consumption demand in India
The company’s Bicycles, Engineering and Metal Forms businesses leverage on the
consumption boom in India, which is being driven by under-penetration, rising
discretionary spending and changing demographic profiles in India.
Based on industry studies (Ernst & Young), the Indian auto market is estimated to
clock the fastest compounded annual growth rate between 2009 and 2020, more than
double that of China and the triad of North America, Europe and Japan. According to
Ernst & Young, India is expected to record a CAGR of 14% during 2009-20, compared
with China at 6%, other emerging markets at 6% (which includes BRIC nations) and
the triad of North America/Europe/Japan at 4%.
The main reasons for the expected growth are:
As incomes rise, people have a tendency to rely more and more on personal
vehicles;
Rapid growth in vehicle financing;
The availability of a wider range of products, especially low-cost cars such as the
Nano and other global cars that have been made suitable for Indian conditions.
Dominant market share in all businesses
The company has a strong competitive position and dominant market shares in all its
three main businesses — Bicycles, Engineering and Metal Formed Products.
In Bicycles, the company has the second-largest market share of almost 40%, just
behind the Hero group, which has a market share of around 47%. Similarly, in the
precision welded tubes (CDW segment), it has a market share of 40%; in automotive
chains its market share is 40%, and in metal-formed car doorframes market share is
almost 60%.
All the three business are profitable, free cashflow generating, with an average ROCE
of over 20%.
The company has also entered new fast-growing segments such as railways (INR1bn
in revenue in FY10), and industrial chains, which is likely to reduce its overdependence
(more than 60% in engineering and the metal-formed businesses) on the
auto-sector.
Strong EPS growth should drive valuations
We estimate the company’s revenue will grow at a CAGR of 19% over the next three
years (FY10-13F) on the back of growth in user industries such as autos and railways.
This will likely result in an EPS CAGR of 37% during the same period, led by improving
margins on account of operating efficiencies.
We also expect other financial parameters to improve: net debt-equity is likely to go
down to around 66% from FY13F and free cashflow (FCF) to INR2,279mn by FY13F;
adjusted ROCE (excluding its investments in financial services) will likely to go up to
34% from FY13F.
Valuation
We have valued the company based on a sum-of-the-parts valuation:
One-year forward P/E multiple of 13.5x on the stand alone one-year forward EPS of
INR11.08 yields a value of INR150/share for the core business;
Its 60% stake in Cholamandalam Finance is valued at INR34/share based on a
40% holding discount;
At our price target of INR184, the target P/E ratio comes to 16.1x, which is in line
with the past six months’ average P/E of 16.0x observed for the stock;
Likewise, the target EV/EBITDA is 7x which is a 20% discount to the average for
the past five years (see Exhibit below);
The one-year forward P/E multiple of 13.5x for the standalone business is justified
as it has high-quality and high ROCE bicycle business and engineering & metalform
businesses, where the company has a dominant market share.
We have not assigned any value to the general insurance business, in which the
company holds a 74% stake and had a market share of 2.3% in FY10. We believe the
financial performance of the insurance industry in India is improving, as both large
PSU players as well as new entrants have stopped price under-cutting. Also, the
company has exited the loss-making health insurance segment.
In our view, the divestment of its financial services business could be a substantial
trigger for the stock, though the company has issued no timeline.
Risks to our investment view
Slowdown in GDP growth in India
Growth of the auto industry in India largely depends on GDP growth; hence, any
slowdown in GDP growth may have a negative impact on the company’s prospects.
Increase in interest rates in India
The auto-industry in India is sensitive to interest rates; hence, an increase in interest
rates could impair the growth of the company.
The company is mainly in three core business
The company is into three businesses on a standalone basis: the Bicycle business,
Engineering business and Metal Formed products business. The company has
subsidiaries in two other businesses: Cholamandalam Investment & Finance, which is
into financial services and Cholamandalam (MS) General Insurance, which is in the
insurance business.
Bicycles business
The company’s bicycle business is on a steady growth track, with a high ROCE
(>100% in 1H FY11), is a direct play on increasing discretionary expenditure by households
in India. The company has the second-largest market share (~40%) in a
consolidated industry, which comprises two segments — standard (60% of total) and
‘specials’ (40% of total). The specials sell into the high-end bikes segment, which is
growing at 10% pa, while the industry growth for standards is not as pronounced.
In the bicycles business, the company has two broad brand categories, namely BSA
and Hercules, which are targeted at the specials and the standard segments,
respectively. Both these brands are well recognised by local consumers and vintage
cycle fans will recognise these storied names as well.
The company has transformed its bicycles business over the past three to four years
and taken the lead in growing awareness about the benefits of cycling. This has been
done by:
Launching products in each segment such as children, women and girls (SLR and
captain), mountain bikes and distributing high-end bikes;
Creating awareness about cycling by organising events such as ‘cyclethons’ and
other cycling events (400-500 events per year) across the country;
Hiring a sales team of 150 to 200 sales persons and creating multi-location
manufacturing facilities in Coimbatore, Nasik and Noida to reduce lead times and
transportation costs;
Creating a chain of distributors, retailers and exclusive stores (which also sell other
accessories and fitness equipment);
Creating a hub of vendors near each manufacturing location and outsourcing most
items to those vendors, apart from finishing, and painting.
Valuation methodology
TI’s all three businesses — Metal-Formed, Engineering and Bicycles are consolidated
industries, where the company has dominant market shares. Also, the combined
ROCE of these businesses, as of 1H FY11, is 30%, which is likely to continue, in our
estimates.
We have valued the company based on a sum-of-the-parts methodology:
One-year forward P/E multiple of 13.5x on a stand-alone one-year forward EPS of
INR11.08 gives a value of INR150/share.
We have valued its 60% stake in Cholamandalam Finance at INR34 per share,
based on 40% holding discount.
At our price target of INR184, the target P/E ratio comes to 16.1x, which is in line with
recent past (six months) average P/E of 16.0x observed for the stock.
Similarly, the target EV/EBITDA comes to 7x, which is a 20% discount to the average
for the past five years.
The one-year forward P/E multiple of 13.5x for the standalone business is justified as
these are high-quality and high ROCE businesses where the company has dominant
market shares.
This is also in line with the average for a comparable auto and auto-comp universe.
This also translates into one-year forward EV/EBIDTA of 7x, in line with the average of
our universe.
We haven’t assigned any value to the general insurance business, in which the
company holds a 74% stake and held a market share of 2.3% in FY10. We believe the
financial parameters of this industry are improving, as both large PSU players and new
entrants have stopped price under-cutting. Also, the company has exited the lossmaking
health insurance segment.
In our view, the divestment of its financial services business could be a potential
trigger for the stock.
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