Tube Investments of India: Buy:: Business Line

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The stock of Tube Investments of India (Tube Investments), a part of the Murugappa Group, has more than doubled since our buy call in January last year.

This has been thanks to the company’s good show in the half-year ended September 2014 and upbeat sentiment about cyclical stocks.

With Tube Investments’ growth prospects continuing to show promise, investors can consider buying the stock at the current market price of ₹344.

A sum-of-the-parts valuation, taking into account the company’s core operations as also its financial services business, suggests further upside for a target price of around ₹370.

Also, there is the possibility of the insurance business getting re-rated, given the further opening up of the sector.

Pick-up in auto sector

The automobile sector is the biggest demand driver for Tube Investment’s core business, comprising engineering products, value-added metal products and cycles. It accounts for almost 80 per cent of the demand for the company’s engineering and value-added metal products.

While the slowdown in the auto sector hurt the core operations last fiscal, a pick-up since then, particularly in the two-wheeler segment, has boosted sales. This aided the 12-14 per cent revenue growth in the two segments for the half-year ended September 2014. The auto sector is expected to grow, despite the recent withdrawal of excise duty cuts. Easing inflation and likely interest rate cuts should boost the demand for two-wheelers and cars, thus keeping up the demand for the products.

Also, the company’s joint venture with Japan’s Tsubamex Company to manufacture dies will help it cater to the demand for stamping dies from the automotive industry.

Tube Investments is also deepening its presence in the non-auto space.

The recently set up diameter tubes facility at Thirutanni in Tamil Nadu will manufacture hydraulic cylinders, propeller shafts and other products for the infrastructure sector.

Demand for these products is currently being met through imports. The plant, under trial production, is expected to generate an annual revenue of ₹360 crore (around 9 per cent of core business revenue) once fully commissioned.

Strong financial services

Apart from its core operations, Tube Investments holds more than 50 per cent stake in Chola Investment & Finance Company (CIFCL) and 74 per cent stake in Chola MS General Insurance.

The financial services business accounts for over half the consolidated revenue and around 70 per cent of consolidated profit.

For the half-year ended September 2014, CIFCL’s profit grew 6.5 per cent to ₹195 crore and Chola MS General Insurance reported 79 per cent higher profit at ₹68 crore.

Pick-up in economic growth should provide a further boost to the businesses.

The recent hike in foreign direct investment limit in the insurance sector from 26 per cent to 49 per cent provides a venue for Tube Investments to monetise its stake in the insurance venture.

Good show

In the half-year ended September 2014, Tube Investments’ net profit grew 15 per cent year-on-year to ₹190 crore. This was despite the 8 per cent fall in net profit from standalone operations due to higher depreciation and finance cost.

At the operating level, the standalone business also reported an improvement, with profit up 7 per cent from the corresponding previous period.

While the company’s standalone debt-to-equity ratio is at a comfortable 0.8 times as on September 2014, its interest coverage ratio is low at two times.

An improvement in earnings and an expected easing in interest rates should however, provide some relief on this front.