TRF - Regains lost ground, Retain Accumulate:: Emkay

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TRF

Regains lost ground, Retain Accumulate

ACCUMULATE

CMP: Rs 504                                        Target Price: Rs 586

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n     TRF regains lost ground – posted standalone net profit of Rs174 mn (Vs estimate of Rs80 mn. But, auto business posted net loss of Rs7 mn (Vs net profit of Rs19 mn)

n     Order book at Rs18 bn (-8% qoq) – with NO order wins in Q2FY11 and Q3FY11. Strong order bid pipeline – finalization can spillover in Q1FY12E

n     TRF expects momentum to begin from Q4FY11E and continue in FY12E  – led by execution in large NTPC project orders and commencement of new capacities in Auto business

n     NOT upgrading rating, despite price correction – looking at cues for earnings upgrades. Until then retain ACCUMULATE rating with revised price target of Rs586/Share (10X FY12E)

Regains some lost ground – Net profit at Rs174 mn versus expectation of

Rs80 mn

After a disappointing Q2FY11, TRF (Standalone) posted strong performance in Q3FY11

with net profit of Rs174 mn (down 24% yoy) – surpassing our estimates of Rs80 mn.

Strong performance was despite lower than expected revenue performance at Rs1.5 bn

(down 31% yoy) – led by 42% yoy decline in Projects division to Rs1.1 bn. Products

division was chief contributor - growing 52% yoy to Rs731 mn. EBIDTA at Rs230 mn

was ahead of estimates – led by healthy EBIDTA margins at 15.4% (Vs estimate of

7.4%). High EBIDTA margins was attributed to favorable revenue mix – relatively higher

contribution from high-margin Product business at 40%.

Mixed performance by Auto – Revenue up 50%, but could not turnaround

operations

TRF’s auto business (comprising York Transport Equipment (York), Dutch Lanka

Trailers (DLT) and JV- Adithya Automotive (AAA)) delivered mixed performance – (1)

Revenues up 50% yoy to Rs990 mn, above estimates (2) EBIDTA up 71% yoy to Rs34

mn with EBIDTA margins at 3.4% (+40 bps yoy) and (3) Net loss at Rs7 mn – Vs

estimate of net profit of Rs19 mn. Auto business continues to report net loss, 9MFY11

net loss at Rs34.8 mn, driving up the implied requirement for Q4FY11. We have finetuned

our expectations to factor net loss in 9MFY11 period.

Order book at Rs18 bn (down 8% qoq) – but strong order bid pipeline

TRF had virtually NO order inflows for 2nd consecutive quarter – attributed to continued

delay and postponement in order finalization by customers (primarily NTPC).

Consequently, its order book declined 8% sequentially to Rs18 bn – but offers healthy

cover at 2.2X FY11E revenues. TRF has indicated healthy order bid-pipeline from both

public (NTPC) and private players (Tata Steel (Kalinganagar - RM handling plant), BoP

order (Maharashtra based private player). But, finalization of orders (especially) NTPC

could possibly spillover to Q1FY12E.

TRF shares strong outlook for Q4FY11E and FY12E – No Change in

consolidated earnings estimates

TRF shared strong outlook for Q4FY11E – despite lower execution in 9MFY11 and higher

implied execution for Q4FY11E. Since, two key projects i.e. Barth (Rs3.2 bn) & Mauda

(Rs3.0 bn) has crossed revenue recognition limits, revenue booking to gain momentum.

Also, Auto business would gain momentum from utilization of new capacities at York India,

Tata DLT and AAA Automotives. Hence, TRF expects strong momentum beginning

Q4FY11E and is well-placed to carry-forward in FY12E. However, above is factored in our

earnings estimates for FY11E and FY12E.

Retain Accumulate; Revise target price to Rs586 per share

We are not upgrading the rating on TRF, despite sharp decline in stock price and

corresponding valuations in recent quarters. We would wait for visible signs of earnings

upgrades, which could emanate from margin upgrades in MHE and Auto business. Until

then, we retain ACCUMULATE rating with revised target price of Rs586/Share, discounting

FY12E earnings at 10X.