Buy Tube Investments of India - Aditya Birla Money

Tube Investments of India Ltd. (TI) - Q2FY13 results below expectations on the standalone front; financial subsidiaries continue their strong performance; maintain Buy rating with revised target price of Rs.201.

Key Highlights

TI's Q2FY13 consolidated net profit grew 21.7% YoY to Rs.756.6mn on account of strong performance of its financial services subsidiaries: CIFCL and Cholamandalam MS General Insurance Co. Ltd.. CIFCL's net profit for the quarter grew 97.1% YoY to Rs.690.0mn. CIFCL's net loan book for the quarter grew 40.5% YoY to Rs.147.8bn while its GNPA and NPA continued to be low at 1.06% and 0.57%, reflecting quality growth. Cholamandalam MS General Insurance Company Ltd., a general insurance subsidiary of TI, registered a growth of 11% YoY in Gross Written Premium during the quarter. Its PAT grew 40% YoY to Rs.100mn.

- On a standalone basis, TI's EBITDA declined 0.8% YoY and 8.9% QoQ to Rs.826.2mn on account of (1) a sharp drop in performance in the metal formed products division due to lower sales volume, higher costs and pricing pressure and (2) lower sales volume and cost pressure in the Engineering division.

- The metal formed products division's EBIT declined 13.7% YoY and 5.9% QoQ to Rs.221.3mn. In the chains segment of the metal formed products division, auto chains sales volumes were down 12% YoY due to automobile growth slowing down, industrial chains sales volumes were down 26% due to a general domestic industrial slowdown, and export volumes were flat YoY. Car doorframes sales volumes declined 2% YoY. The railway products division saw some sales volume growth but realisations and margins faced pressure due to competition.

- In the engineering division, precision steel tubes sales volumes declined 1% YoY due to automobile growth slowing down significantly. It also faced cost pressures from higher raw material costs and power & fuel, resulting in the Engineering division's EBIT declining 0.2% YoY and 11.2% QoQ to Rs.285.4mn.

- In the bicycles division, sales volume grew 10% YoY on account of high volumes from institutional orders (Governments of Tamil Nadu and Karnataka primarily being the clients). The bicycles division's EBIT grew 4.9% YoY and 2.5% QoQ to Rs.221.0mn.

- Standalone PAT for the quarter declined 17.6% YoY and 3.2% QoQ to Rs.371.9mn Outlook and valuations - On account of lower-than-expected sales volumes, we reduce our volume assumptions for FY13E and FY14E (Refer Table-1 on Page-2). We also incorporate interest costs from the Shanthi Gears acquisition. Consequently, we cut our FY13E and FY14E EPS by 11.7% and 12.9% to Rs.8.9 and Rs.9.5 respectively.

For our SOTP valuation of TI, we ascribe a higher valuation of 1.5x equity investment to TI's general insurance subsidiary - Cholamandalam MS General Insurance Company Ltd - from 1x earlier on account of significant traction in the business and achievement of sustainable profitability. We note that our valuation for TI's general insurance subsidiary has upside risks as the FDI limit of 26% in insurance is hiked to 49% over time. We have not ascribed any valuation to Shanthi Gears as we think strategic benefits from the acquisition would take at least two years to fructify. With the revision of earnings estimates downwards, higher valuation for TI's general insurance subsidiary and quarterly rollover of our 1 year forward SOTP value, our 1 year target price increases by ~6% to Rs.201 per share. Our target price of Rs.201 implies a potential upside of 19.6%. We maintain our Buy rating on TI.

Source : Equity Bulls

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