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UBS Investment Research
Tube Investments of India
Operationally strong 4Q
„ Event: 4QFY11 results marginally below exp but strong operationally
Tube Investments (TI) Q4 FY11 adjusted net profit of Rs 465 mn (65% YoY, 24%
QoQ) was marginally below estimates. 4Q had strong operational numbers -
revenues up 23% yoy and EBITDA margins up 90bps yoy, despite raw material
price pressures. EBIT ROCEs were up yoy and sequentially for all segments
„ Impact: Cut estimates on huge capex announced
Management announced huge capex for next year of Rs 5-6bn, to be funded by
internal generation and debt (FY12E debt:equity at 0.9x). This will be spent on
increasing capacity and adding new higher-margins product, benefits of which will
start accruing from FY13. We cut our FY12/13 EPS by 10%/5% to account for
higher depreciation/interest costs. Management remains confident of strong growth
and stable margins in FY12.
„ Action: BUY, play on consumption/infra with value unlocking potential
We believe the current price (Rs135), at best, reflects only TI’s bicycle (FY11
ROCE of 105%), auto/infra parts businesses. We do not think it reflects the
company’s investment holdings (in Cholamandalam) - worth Rs46/share based on
book value and Rs106/share based on our fair valuation.
„ Valuation: Reiterate Buy with a PT of Rs206
We increase our SOTP-based price target to Rs206 from Rs197 as we roll it over to
FY13 estimates and includes Rs53 for TI’s investments (at 50% holding company
discount)
Key takeaways from conference call:
Q Management remains confident of strong growth and stable margins in FY12.
Q Cost pressures from steel/raw materials/fuel is there, but volumes and
efficiency improvements will help in maintaining margins
Q Bicycle - Expect double digit growth driven by new products (carbon fibre
and for cycle enthusiasts), retail chain/distribution expansion in rural areas
(from 15-20 now to 100 in FY12). Margin decline in 4Q was a blip as raw
material pressure not passed on, will get passed on by end of 1Q FY12.
Q Engineering - New plant for large diameter products planned - margins could
be 13-15% - far better than automotive tubes.
Q Metal formed products - auto chains (up 40% yoy) and door frame did well
in FY11. Enough capacity to meet Railway demand.
Q Huge capex announced for FY12 at Rs5-6bn. This would be funded by
internal generation and long term loans and debt: equity would remain below
1x.
— Rs2bn for a new large diameter tube plant for infrastructure sector - used
for hydraulic cylinders and is an import substitution product. This
product/plant would have Rs5bn revenue potential
— Rs2bn for a new plant in North India for automotive tubes
— Rs1-2bn for automotive chains and bicycles (to cater to East India -
untapped market for bicycles)
Q Insurance - one time hit on bottom-line. May need to top up investment in
Insurance by max Rs350mn in FY12
Q Tube Investments of India
Tube Investments, part of the Murugappa Group, operates in three different
segments: bicycles/components, engineering and metal formed products. The
company is a market leader in most of its segments and has a strong product
portfolio, mainly catering to demand from the auto industry. Its products include
bicycles, bicycle components, fitness equipment and electric scooters in the
bicycle segment; precision tubes and cold-rolled steel strips in the engineering
segment; and roll-formed car doorframes, sections for railway wagons, and
automotive and industrial chains in the metal formed products segment.
Q Statement of Risk
We believe the key risks facing the company are volatility in raw material prices,
competition in the engineering and metal formed products business, cyclical risk
and risk of a global macro slowdown.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Tube Investments of India
Operationally strong 4Q
„ Event: 4QFY11 results marginally below exp but strong operationally
Tube Investments (TI) Q4 FY11 adjusted net profit of Rs 465 mn (65% YoY, 24%
QoQ) was marginally below estimates. 4Q had strong operational numbers -
revenues up 23% yoy and EBITDA margins up 90bps yoy, despite raw material
price pressures. EBIT ROCEs were up yoy and sequentially for all segments
„ Impact: Cut estimates on huge capex announced
Management announced huge capex for next year of Rs 5-6bn, to be funded by
internal generation and debt (FY12E debt:equity at 0.9x). This will be spent on
increasing capacity and adding new higher-margins product, benefits of which will
start accruing from FY13. We cut our FY12/13 EPS by 10%/5% to account for
higher depreciation/interest costs. Management remains confident of strong growth
and stable margins in FY12.
„ Action: BUY, play on consumption/infra with value unlocking potential
We believe the current price (Rs135), at best, reflects only TI’s bicycle (FY11
ROCE of 105%), auto/infra parts businesses. We do not think it reflects the
company’s investment holdings (in Cholamandalam) - worth Rs46/share based on
book value and Rs106/share based on our fair valuation.
„ Valuation: Reiterate Buy with a PT of Rs206
We increase our SOTP-based price target to Rs206 from Rs197 as we roll it over to
FY13 estimates and includes Rs53 for TI’s investments (at 50% holding company
discount)
Key takeaways from conference call:
Q Management remains confident of strong growth and stable margins in FY12.
Q Cost pressures from steel/raw materials/fuel is there, but volumes and
efficiency improvements will help in maintaining margins
Q Bicycle - Expect double digit growth driven by new products (carbon fibre
and for cycle enthusiasts), retail chain/distribution expansion in rural areas
(from 15-20 now to 100 in FY12). Margin decline in 4Q was a blip as raw
material pressure not passed on, will get passed on by end of 1Q FY12.
Q Engineering - New plant for large diameter products planned - margins could
be 13-15% - far better than automotive tubes.
Q Metal formed products - auto chains (up 40% yoy) and door frame did well
in FY11. Enough capacity to meet Railway demand.
Q Huge capex announced for FY12 at Rs5-6bn. This would be funded by
internal generation and long term loans and debt: equity would remain below
1x.
— Rs2bn for a new large diameter tube plant for infrastructure sector - used
for hydraulic cylinders and is an import substitution product. This
product/plant would have Rs5bn revenue potential
— Rs2bn for a new plant in North India for automotive tubes
— Rs1-2bn for automotive chains and bicycles (to cater to East India -
untapped market for bicycles)
Q Insurance - one time hit on bottom-line. May need to top up investment in
Insurance by max Rs350mn in FY12
Q Tube Investments of India
Tube Investments, part of the Murugappa Group, operates in three different
segments: bicycles/components, engineering and metal formed products. The
company is a market leader in most of its segments and has a strong product
portfolio, mainly catering to demand from the auto industry. Its products include
bicycles, bicycle components, fitness equipment and electric scooters in the
bicycle segment; precision tubes and cold-rolled steel strips in the engineering
segment; and roll-formed car doorframes, sections for railway wagons, and
automotive and industrial chains in the metal formed products segment.
Q Statement of Risk
We believe the key risks facing the company are volatility in raw material prices,
competition in the engineering and metal formed products business, cyclical risk
and risk of a global macro slowdown.
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