Gandhi Special Tubes- ICICI Sec Nano Nivesh Picks

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Gandhi Special Tubes (GANSPE)
Gandhi Special Tubes (GST) is a leading manufacturer of small
diameter seamless and welded steel tubes, which find application in
automotive, hydraulics, refrigeration (condenser tubes) and other
engineering services. With the CV cycle on the cusp of a cyclical
recovery and the expected revival in construction/mining activity, we
expect GST’s sales and PAT to grow at a CAGR of 16.8% and 23.9%,
respectively, in FY14-17E.
Highlights
• Product segment catering to core industrial activity: GST’s
product segment finds application in core economic activity with
products catering to capex oriented industries viz. commercial
vehicles (CVs) and construction & mining (hydraulics). In the
automotive space, GST manufactures small diameter seamless
steel tubes that are used as fuel injection tubes in the CV category.
In the hydraulics space, the company manufactures small
diameter seamless steel tubes, which are used in material
handling equipment mainly used in mining & construction activity
• Small diameter seamless tubes - dominant player, high margins
business: Seamless tubes contributed a healthy ~68% to overall
sales (FY14 sales of | 60 crore; total gross sales of | 89 crore). It is
a key revenue contributor for GST, which has on a consistent
basis commanded a healthy 60% share in total sales. Out of | 60
crore, ~| 30 crore (i.e. 33% of total sales) is realised from fuel
injection tubes for CVs, in which GST enjoys a virtual monopoly.
The company enjoys a healthy 30%+ EBITDA margins in this
segment with competition to some extent from some Chinese
players. End users of this segment include major CV players viz.
Tata Motors, Ashok Leyland and M&M among others
• Lean balance sheet, key beneficiary of capex cycle revival: GST
has a lean balance sheet with no debt and net cash & investments
of | 65 crore as of FY14 (cash as a percentage of Mcap at ~20%).
With a slowdown in the CV space coupled with low capacity
utilisations, GST’s RoCEs, RoEs have declined to 13.8%, 11.2% in
FY14, respectively. However, with the CV cycle on the cusp of a
cyclical recovery and the expected revival in construction/mining
activity, we expect GST’s sales and PAT to grow at a CAGR of
16.8% and 23.9%, respectively, in FY14-17E. We have valued the
company at | 310-330, i.e. 14-15x P/E on FY17E EPS of |
22.4/share

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