Tube Investments of India Recommendation Review: Hold The Counter

We had recommended Tube Investments of India (TII), a Murugappa Group company, to our investors in DSIJ Vol. 26, Issue No. 24 (dated November 7-20, 2011), when the scrip was trading at Rs 140. Our recommendation was backed by factors like the company’s capacity expansion plans, the expected improvement in its margins due to falling raw material prices, the introduction of new products, its better financial performance and a consistent dividend payment history.

TII’s standalone business is split into three major categories. The first is bicycles and fitness equipment. The second is the engineering division, which produces electric resistance welded tubes and cold-rolled steel strips. The third is the metals forming division, which produces car door frames and industrial as well as automotive chains.

After our recommendation, the company announced its December 2011 results. Here, the company’s topline witnessed an up-move, though the margins remained under pressure due to higher raw material prices. The topline stood at Rs 879.22 crore while the bottomline stood at Rs 21.17 crore as against Rs 752.07 crore and Rs 51.89 crore (including Rs 20.60 crore extraordinary income) respectively for the previous year. So, there was hardly any improvement in the bottomline.

At the current levels, we are of the opinion that one should hold the counter, as the cycles division may get some traction after the customs duty has been increased multi-fold. Further, the automobile companies are also expected to witness double digit growth in 2012, and as a result, the metals forming division is also expected to do well. However, the raw material prices are still high, and thus, margins improvement may not happen. As the steel prices witness some decline though, we expect the company to put in a better performance. Hence, we recommend that investors hold the counter.