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Results disappoint; margins slump
TRF reported disappointing Q3FY11 numbers. Consolidated revenue de-grew 12%
Y-o-Y, to INR 2,484 mn. The muted execution projects business led to fall in
revenue, with de-growth of 41.6% Y-o-Y, to INR 1,093 mn. The products
business, which catapulted 51% Y-o-Y to INR 1,721 mn, helped arrest further fall
in revenue. While the company benefited from lower raw material costs (down
109bps Y-o-Y to 65.6% of sales), employees cost and other expenses (up 237bps
and 215bps Y-o-Y to 8.6% and 15.1% of sales, respectively) led to 344bps Y-o-Y
fall in EBITDA margin to 10.6%. Weaker operating performance led consolidated
EBITDA de-growth at 33.5% to INR 264 mn. Lower effective tax rate, however,
helped curb PAT degrowth at 33% Y-o-Y to INR 168 mn, despite higher interest
cost.
Concerns on order flows; pipeline strong
With continued deferral in order finalisation, mainly by NTPC (due to some issues
with railways), the company continued with no order inflows for the second
quarter during the year. Management, however, expects these issues to resolve in
Q4FY11 and expects pick-up in order flows in FY12.
Order backlog grew merely 10%, to INR 18.7 bn (2.2x its FY10 revenue) at
Q3FY11 end, with NTPC forming 65% (INR 12 bn) of it. Order pipeline, however,
remains strong, with orders from NTPC, Tata Steel and some private players.
Outlook and valuations: Challenging; downgrade to ‘HOLD’
While we like TRF’s product business, delayed execution in projects business is
worrisome. We expect projects to continue to lag in terms of execution for the
next few quarters. Moreover, the auto business continues to reflect some
concerns in terms of profitability, with Tata DLT continuing to lag profit targets.
We would wait for execution to pick up in projects and auto businesses, making
them profitable, before considering an upgrade.
TRF is looking at a new facility at Pune, with capacity to manufacture 3,000
trailers. It is also looking at pursuing balance of plant (BoP) business seriously
and has already established an office at Kolkata for the same. These could be
growth triggers, going forward.
At our EPS of INR 31.9 and INR 58.0, the stock is currently trading at 15.3x and
8.4x its FY11E and FY12E earnings, respectively. Given near-term concerns in the
projects and auto businesses, we downgrade the stock to ‘HOLD’ from ‘BUY’
earlier.
Company Description
Formerly known as Tata-Robins-Fraser, TRF was incorporated in 1962 jointly promoted
by TISCO and ACC in financial and technical collaboration with Hewitt-Robbins (US) and
General Electric company ltd (UK). At present it no longer has tie-ups with Hewitt-
Robbins (US) and General Electric company ltd (UK). It caters to core infrastructure
industries through three business divisions. In bulk material handling equipment TRF
specializes in design and manufacture of a wide range of equipment, especially material
handling, which is used in infrastructure industries. In the Bulk material handling
systems division it offers a complete package of material handling and allied systems and
services on a turnkey basis. In the Port and Yard equipment division it focuses on design,
supply, erection and commissioning of bulk and unit material handling equipment for
ports and stockyards, including level luffing cranes, ship loaders and unloaders, container
cranes, stacker reclaimers and special purpose cranes for power and metallurgical plants.
It also implements projects and provides engineering, procurement and construction
management (EPC/M) services to set up small and medium size plants (blast furnaces,
sinter plants and coal washeries).
Investment Theme
TRF provides engineered equipment, systems and services, including EPC/EPCM
(equipment procurement and construction/maintenance) services, bulk material handling
systems and equipment, coal beneficiation systems, coal dust injection systems and coke
oven equipment for steel plants, and port and yard equipment. It caters to thermal
power plants, and coal, mining, steel and ports sectors. Over the past three years, 75%
of the company’s revenues have come from power and ports sectors. Revenue mix
comprises products (where standalone products are sold) and projects businesses
(where all aforementioned services are provided along with products) by TRF. With its
strong track record of executing major projects in various businesses, we believe the
company is a key beneficiary of growth in core infrastructure sectors. TRF has an order
book of INR 11 bn currently executable over the next two years and had bid for projects
in the power, steel and mining sectors. Accretion to the order book from will positive for
the company as there will be revenue visibility going forward.
In order to reduce its exposure to the bulk material handling it acquired 51% stake in
York Transport Equipment Asia Pte in October 2007 engaged in the business of
manufacturing and distributing trailer axles and related products, also it has recently
acquired 51% in Dutch Lanka Trailer engaged in the business of manufacturing trailers.
Key Risks
Rise in direct costs
Direct costs are 68% of sales, of which, raw material accounts for 57%. Any major
fluctuation in raw material costs can affect margins as majority contracts are fixed price
in nature.
High working capital cycle
TRF has very high debtors to sales. In the past five years, debtors are at 175 days, and
are likely to continue to remain high.
Slowdown in economy
Economic slowdown could affect TRF’s clients, thereby affecting its performance.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Results disappoint; margins slump
TRF reported disappointing Q3FY11 numbers. Consolidated revenue de-grew 12%
Y-o-Y, to INR 2,484 mn. The muted execution projects business led to fall in
revenue, with de-growth of 41.6% Y-o-Y, to INR 1,093 mn. The products
business, which catapulted 51% Y-o-Y to INR 1,721 mn, helped arrest further fall
in revenue. While the company benefited from lower raw material costs (down
109bps Y-o-Y to 65.6% of sales), employees cost and other expenses (up 237bps
and 215bps Y-o-Y to 8.6% and 15.1% of sales, respectively) led to 344bps Y-o-Y
fall in EBITDA margin to 10.6%. Weaker operating performance led consolidated
EBITDA de-growth at 33.5% to INR 264 mn. Lower effective tax rate, however,
helped curb PAT degrowth at 33% Y-o-Y to INR 168 mn, despite higher interest
cost.
Concerns on order flows; pipeline strong
With continued deferral in order finalisation, mainly by NTPC (due to some issues
with railways), the company continued with no order inflows for the second
quarter during the year. Management, however, expects these issues to resolve in
Q4FY11 and expects pick-up in order flows in FY12.
Order backlog grew merely 10%, to INR 18.7 bn (2.2x its FY10 revenue) at
Q3FY11 end, with NTPC forming 65% (INR 12 bn) of it. Order pipeline, however,
remains strong, with orders from NTPC, Tata Steel and some private players.
Outlook and valuations: Challenging; downgrade to ‘HOLD’
While we like TRF’s product business, delayed execution in projects business is
worrisome. We expect projects to continue to lag in terms of execution for the
next few quarters. Moreover, the auto business continues to reflect some
concerns in terms of profitability, with Tata DLT continuing to lag profit targets.
We would wait for execution to pick up in projects and auto businesses, making
them profitable, before considering an upgrade.
TRF is looking at a new facility at Pune, with capacity to manufacture 3,000
trailers. It is also looking at pursuing balance of plant (BoP) business seriously
and has already established an office at Kolkata for the same. These could be
growth triggers, going forward.
At our EPS of INR 31.9 and INR 58.0, the stock is currently trading at 15.3x and
8.4x its FY11E and FY12E earnings, respectively. Given near-term concerns in the
projects and auto businesses, we downgrade the stock to ‘HOLD’ from ‘BUY’
earlier.
Company Description
Formerly known as Tata-Robins-Fraser, TRF was incorporated in 1962 jointly promoted
by TISCO and ACC in financial and technical collaboration with Hewitt-Robbins (US) and
General Electric company ltd (UK). At present it no longer has tie-ups with Hewitt-
Robbins (US) and General Electric company ltd (UK). It caters to core infrastructure
industries through three business divisions. In bulk material handling equipment TRF
specializes in design and manufacture of a wide range of equipment, especially material
handling, which is used in infrastructure industries. In the Bulk material handling
systems division it offers a complete package of material handling and allied systems and
services on a turnkey basis. In the Port and Yard equipment division it focuses on design,
supply, erection and commissioning of bulk and unit material handling equipment for
ports and stockyards, including level luffing cranes, ship loaders and unloaders, container
cranes, stacker reclaimers and special purpose cranes for power and metallurgical plants.
It also implements projects and provides engineering, procurement and construction
management (EPC/M) services to set up small and medium size plants (blast furnaces,
sinter plants and coal washeries).
Investment Theme
TRF provides engineered equipment, systems and services, including EPC/EPCM
(equipment procurement and construction/maintenance) services, bulk material handling
systems and equipment, coal beneficiation systems, coal dust injection systems and coke
oven equipment for steel plants, and port and yard equipment. It caters to thermal
power plants, and coal, mining, steel and ports sectors. Over the past three years, 75%
of the company’s revenues have come from power and ports sectors. Revenue mix
comprises products (where standalone products are sold) and projects businesses
(where all aforementioned services are provided along with products) by TRF. With its
strong track record of executing major projects in various businesses, we believe the
company is a key beneficiary of growth in core infrastructure sectors. TRF has an order
book of INR 11 bn currently executable over the next two years and had bid for projects
in the power, steel and mining sectors. Accretion to the order book from will positive for
the company as there will be revenue visibility going forward.
In order to reduce its exposure to the bulk material handling it acquired 51% stake in
York Transport Equipment Asia Pte in October 2007 engaged in the business of
manufacturing and distributing trailer axles and related products, also it has recently
acquired 51% in Dutch Lanka Trailer engaged in the business of manufacturing trailers.
Key Risks
Rise in direct costs
Direct costs are 68% of sales, of which, raw material accounts for 57%. Any major
fluctuation in raw material costs can affect margins as majority contracts are fixed price
in nature.
High working capital cycle
TRF has very high debtors to sales. In the past five years, debtors are at 175 days, and
are likely to continue to remain high.
Slowdown in economy
Economic slowdown could affect TRF’s clients, thereby affecting its performance.
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