Gandhi Special Tubes report: ICICI Securities

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Key beneficiary of capex cycle revival…
We recently met the Director of Gandhi Special Tubes (GST), Mr Jayesh
Gandhi, to understand the domestic small diameter steel tubes industry
and the company’s role in the entire supply chain. GST is a manufacturer
of small diameter (outer diameter 3-75 mm) seamless and welded steel
tubes, which find application in automotive, hydraulics, refrigeration
(condenser tubes) and other engineering services. In the automotive
space, the company manufactures seamless steel tubes that are used as
fuel injection tubes in the commercial vehicles (diesel) category. In the
hydraulics space, the company manufactures seamless steel tubes, which
are used in material handling equipment mainly used in mining &
construction activity. GST’s topline growth has been subdued (3.2%
CAGR in FY10-14) in the past on the back of a slowdown in the
commercial vehicle (CV) and mining & construction space. GST clocked a
topline of | 83.5 crore in FY14 with corresponding EBITDA at | 26.1 crore
(EBITDA margins at 31.3%) and PAT at | 17.3 crore. The company’s
presence in a niche segment coupled with low competitive intensity has
aided superior EBITDA margins (30-40%) in the past. With the CV cycle
on the cusp of a cyclical recovery and the expected revival in
construction/mining activity, we believe GST is on a strong footing of
recovery with increasing sales & profitability, going forward.
Seamless hollow tubes – highest contributor to topline
GST’s sales comprise seamless tubes, welded tubes & condensers, steel
nuts and wind power. Among the mentioned segments, seamless tubes
contributed a healthy ~68% to its topline in FY14 (sales of | 60 crore,
total gross sales | 89 crore). It is a key revenue contributor to GST, which
has commanded more than 60% share. Welded tubes & condensers
contributed ~23% to its topline in FY14 (sales of | 23 crore, total gross
sales of | 89 crore). Contribution of steel nuts to the topline stood at ~7%
in FY14 (sales of | 6 crore, total gross sales of | 89 crore). It is a tier 2
supplier with the ultimate consumers being Tata Motors, Ashok Leyland,
Larsen & Toubro, Bhel and M&M among others.
Lean balance sheet; financial strength to grow
GST has a lean balance sheet with no debt and net cash of | 65 crore as
of FY14 (Mcap: ~| 300 crore). It has in the past realised healthy return
ratios in excess of ~30%. However, with a slowdown in the CV space
coupled with low capacity utilisations, RoCEs, RoEs have declined to
13.8%, 11.2% in FY14, respectively. GST has maintained a healthy
dividend payout in the past (~25%+). It is currently quoting at 17.3x FY14
P/E, 1.9x FY14 P/BV and 9x FY14EV/EBITDA. GST would be one of the
prime contenders to benefit from a pick-up in economic activity

Other management meet highlights
• GST manufactures seamless steel tubes, which are of high
precision and quality. The company manufactures seamless steel
pipes that have a small diameter (outer diameter 3-75 mm, with
thickness of 0.5-7.5 mm)
• GST realises ~33% of it total sales from sale of fuel injection
tubes that are used in commercial vehicles (MHCV segment).
These tubes are normally <8 and="" diameter="" in="" mm="" nbsp="" outer="" p="" the="">company enjoys near monopoly in this segment. The company
is an approved material supplier to all major OEMs. GST realises
highest EBITDA margins in this segment
• GST realises ~33% of its total sales from the hydraulics segment
(seamless steel, outer diameter >20 mm), which basically finds
application in material handling equipment that are ultimately
used for mining & construction purposes
• GST has just concluded its capacity expansion programme (new
furnace costing ~| 25 crore) with three furnaces now under
operation. Gross block as of FY14, stood at | 127 crore. The
company is through with its capex and does not see any
meaningful expenditure on the same, going forward
• With the imposition of anti-dumping duty on seamless pipes in
August 2014, the company now intends to source more raw
material indigenously (as against previous preference more
towards imports) and is currently developing the same with
domestic steel pipe manufacturers
• GST’s welded steel tubes find application in the automotive
sector including tractors and condensers, which are used for
freezing/refrigeration purposes. In the refrigeration space, GST’s
products find application in the refrigeration segment of Godrej &
Voltas, among others
• GST also operates five windmills across Gujarat and Maharashtra
and realises ~2% of its total sales from selling the electricity
units produced by these windmills
• GST has in the past maintained a healthy dividend payout with
dividend payout in FY13 and FY14 at 43% and 56%, respectively
(dividend of | 6 /share in FY13 and FY14). The company intends
to maintain a healthy dividend payout, going forward, as well

LINK
http://content.icicidirect.com/mailimages/IDirect_GandhiSpecial_MgmtNote.pdf