Tube Investment Ltd - New Project Dampens Margins; Result Update Q3FY15 ::Edelweiss, report

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Tube Investment Ltd.’s (TI) Q3FY15 results came below expectations. EBITDA margins for the quarter stood at 6.4% Vs estimate of 9.3% led by lower margins in cycle and engineering division. Chola Investment & Finance Ltd., a subsidiary of TI, registered Q3FY15 PAT of INR 111 cr, up 21% YoY. Large Diameter Tube project has commissioned during the quarter. We expect margin to improve going forward due to VRS benefits, improved mix of large diameter tube and operating leverage.

Sales growth at 8% YoY; OEM recovery key for growth

Overall sales for Q3FY15 grew by 8% YoY, led by growth across segments. Cycle division’s revenue grew by 15% YoY, led by execution of large institutional order from government of Tamil Nadu and Karnataka. TI intends to participate in more such institutional orders from other geographies where it was not earlier participating. TI has won new orders in door frames segment for Tata Motors Zest and Bolt. Further

EBITDA margins down QoQ led by one-offs

TI’s Q3FY15 EBITDA margins fell by  210 bps QoQ led by commissioning of large diameter tubes during the quarter and fall in cycle margins due to execution of institutional orders. Engineering segment margins fell by 200 bps QoQ. Company plans to take large diameter tube utilization from current 5% to 50% in next 8 months which will lead better margins for engineering segment. Cycles margins may remain low as company plans to participate in large institutional orders which are typically low margins orders. We expect margins to improve going forward due to VRS benefits, improved mix of large diameter tube and operating leverage.

Insurance subsidiaries report decent results; Capacity utilization to improve in Shanti Gears

Chola Investment and Finance PAT increased to INR 111 cr, a growth of 21% YoY. Disbursement growth remained muted with 8% de-growth YoY. The asset quality remained steady, with Gross NPA increasing marginally from 2.6%. NPAs are expected to peak out in the next few quarters. Shanthi Gears’ sales for the quarter were up by 5% YoY while Q3FY15 PAT came in at INR 3.8 cr. Chola Insurance reported PAT of INR 39 cr for the quarter.

Large diameter tube capacity has come on stream during the quarter

The majority of INR 330 cr capex is aimed at  setting up high-margin Large Diameter Tube capacity, which will come on stream by Q3FY15. The management expects revenue of INR 360 cr.. Large Diameter Tubes are used in hydraulic cylinders for trucks, excavators, earth-movers and off-road vehicles. Large Diameter Pipes would largely substitute imports as there are no domestic players in this space at present.

LINK
https://www.edelweiss.in/research/Tube-Investment-Ltd--New-Project-Dampens-Margins;-Result-Update-Q3FY15/10005554.html