Tube Investments of India - Cycling To Profits
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Tube Investments of India (TII), a Murugappa Group company, is a good buy for investors with a long-term investment perspective. The company’s capacity expansion plans, the expected improvement in its margins due to falling raw material prices, the introduction of new products, better financial performance and a consistent dividend payment history are a few of the compelling factors backing our recommendation. Another element that goes in favour of this recommendation is that it has a stake of 60.50 per cent in Cholamandalam Investment And Finance Company (CIFCO), and is also in an insurance joint venture that provides good monetising opportunities for the future. The present valuations of TII’s holdings in CIFCO stand at Rs 1138 crore, while its market cap is Rs 2664 crore. If one adjusts the value of investments (with a haircut of 30 per cent), the company is available at less than 11x its March 2011 earnings.
TII’s standalone business is split into three major categories. The first is bicycles and fitness equipment (sales of Rs 1114 crore), in which it has the third-largest market share in the domestic market. The company has popular brands in its portfolio, which include Hercules and BSA. The second is the engineering division (sales Rs 1083 crore), which produces electric resistance welded tubes and cold-rolled steel strips. The third is the metals forming division (sales Rs 769 crore), which produces car door frames and industrial as well as automotive chains.
As regards its growth, with the automobile sector (the four-wheeler segment) witnessing a slowdown, investors would be worried that the company may face some headwinds. However, the management, in a recent interview, sounded confident of double-digit growth in TII’s auto-related segments in the current year. In any case, the company’s total revenue from four-wheelers is less than 25 per cent.
TII is also going in for capacity expansion in all the three segments, with a total capex of Rs 600 crore. Of this, Rs 200 crore would be funded through internal accruals and the balance through debt. In the tubes division, the company is investing Rs 300 crore to manufacture larger diameter tubes. Additionally, it is planning to enter the hydraulic tubes segment for the infrastructure sector, so as to reduce its dependence on the auto industry. In the chains segment, it is investing Rs 150 crore to add another 25 per cent capacity at its Uttaranchal facility for import substitution. In the bicycles segment, it is adding a fresh capacity of up to 30 per cent in eastern India, with an investment of Rs 150 crore.
All the expansion plans would go onstream by October-November 2012. In our opinion, this expansion will stand the company in good stead, since the current slowdown is temporary.
On the financial front, the company has performed well in FY11 and also in the first quarter of the current year, during which sales (consolidated) stood at Rs 1471 crore against Rs 1123 crore during the same period last year, indicating a growth of 24 per cent. Its Net Profits grew at 70 per cent to Rs 88.73 crore. We expect the company to benefit from the falling steel prices, as steel accounts for 65 per cent of its raw material inputs. Our advice to readers is to chip in for this scrip in a staggered manner.