Tube Investments BUY
BUY
CMP Rs606 Leveraging manufacturing expertise Target 12m Rs680 (12%) Market cap (US$ m) 1,544 We initiate coverage on Tube Investments of India (TI) with a BUY and TP of Rs680. TI is leveraging its manufacturing and Enterprise value (US$ m) 1,580 R&D expertise to maintain leadership as tier-2 auto Bloomberg TIINDIA IN component supplier as well as to grow the non-auto, exports Sector Metals and railways businesses. The ingrained focus on growth,
profitability, RoCE and cash generation is visible in the
1 October 2020 company’s financials with ROE improving to 19% in FY20. Recent announcement for acquisition of 58.6% stake in CG 52Wk High/Low (Rs) 682/254 Power will drive further diversification away from autos, as Shares o/s (m) 188 capital support and mfg. expertise drive a turnaround. Daily volume (US$ m) 1 Dividend yield FY21ii (%) 0.7 Strong play on recovery in the domestic auto market: TI is a Free float (%) 52.1 leading tier-2 vendor for domestic auto OEMs. 55% of its revenue/Ebit share is backed by strong quality & service levels, deep Shareholding pattern (%) integration in manufacturing with OEMs, well-spread manufacturing Promoter 47.9 facilities and importantly resilient customer relationships. As auto Pledged (as % of promoter share) 0.0 volumes for 2Ws, PVs and tractors recover, TI is well placed to FII 18.2 benefit as the supplier to majority of the auto makers in India. DII 20.6 Non-auto segments also seeing healthy traction: TI’s intent to Price performance (%) lower exposure to auto cyclicality is playing out, as rise in exports’ 1M 3M 1Y share (15% in FY20) gains pace, with focus on product development Tube (6.4) 36.4 57.8 for global auto & industrial customers. The outlook is strong for rail Investments section supplies for coach building, despite near-term hiccups. The Absolute (US$) (5.9) 39.6 52.7 large-diameter tubes segment, driven by import substitution, should Rel.to BSE (6.7) 23.8 53.6 see healthy growth as demand revives in FY22-23. Midcap Opening a new chapter with CG Power acquisition: TI will soon CAGR (%) 3 yrs 5 yrs complete the Rs8bn investment for 58.58% stake in CG Power. While EPS 24.2 (12.5) businesses are distinct, TI plans to leverage its manufacturing and
Stock movement R&D capabilities and provide the much-needed capital for turning around operations. If this ensues as planned, it will significantly lower Vol('000, LHS) Price (Rs., RHS) share of auto, and possibly open-up B2C segments around motors. 3,000 800 600 Fairly valued at CMP; upsides on stronger delivery: Adjusted for 2,000 400 value of CG Power, the stock trades at 26x FY22 PER which we believe 1,000 200 is fair. Faster than expected recovery in core businesses and quick turnaround of CG Power will drive upsides and rerating. 0 0
Financial summary (Rs m) Jul-19
Jul-20
Jan-20 Jan-19
Sep-18 Sep-19 Sep-20
Nov-18 Nov-19
Mar-19 Mar-20 May-20 May-19 Y/e 31 Mar, Consolidated FY19A FY20A FY21ii FY22ii FY23ii
Revenues (Rs m) 57,748 47,504 34,848 45,846 53,193 Ebitda margins (%) 9.4 12.2 11.7 13.3 13.9
Pre-exceptional PAT (Rs m) 2,478 3,352 1,896 3,350 4,271
Reported PAT (Rs m) 2,508 3,133 1,746 3,350 4,271 Pre-exceptional EPS (Rs) 13.2 17.8 10.1 17.8 22.7
Growth (%) 55.9 35.1 (43.5) 76.7 27.5 Anupam Gupta PER (x) 45.9 34.0 60.1 34.0 26.7 [email protected] 91 22 4646 4641 ROE (%) 18.0 20.9 10.7 17.2 19.0 Net debt/equity (x) 0.3 0.1 0.1 (0.1) (0.2) Urvil Bhatt, CFA EV/Ebitda (x) 21.9 20.1 28.5 18.6 14.9 [email protected] Price/book (x) 7.7 6.6 6.2 5.5 4.7 91 22 4646 4648 OCF/Ebitda (x) 0.8 1.0 0.8 1.0 0.8 www.iiflcap.com Source: Company, IIFL Research. Price as at close of business on 30 September 2020.
1 www.iiflcap.com
Tube Investments of India – BUY
Company Snapshot
As part of the large and diversified Murugappa Group, Tube Investment Holdings (TI) is a manufacturing company with a strong established franchise across the auto and industrial sectors in India and overseas. The company has been in business since 1959, continuously building on its growing engineering prowess. It came into its current form in FY17, post restructuring, wherein the financial service business was segregated into TI Financial Holdings.
Engineering and Metal The company operates across three business segments (Engineering, formed products are key Metal Formed Products and Cycles) in the standalone entity and segments for TI accounting holds 70% in Shanti Gears, which sells gears to industrial customers. for 78% of revenues in FY20 It is in the process of acquiring 58.58% stake (post warrant conversion) in CG Power & Industrial Systems, which is a strong player in motors, railway systems and transformers/switchgears.
Figure 1: Summary of Consolidated business segments FY20 (Rs m) Engineering Metal formed Cycles Gears Consolidated Net Sales 22,582 16,348 7,812 2,416 47,504 Share of total 44% 34% 16% 5% PBIT 2,644 1,160 224 327 3,932 PBIT margin 11.7% 7.1% 2.9% 13.5% 8.2% Share of total 58% 25% 5% 6% Capital Employed 6,390 6,215 1,755 2,245 18,753 RoCE 41.4% 18.7% 12.7% 14.6% 20.4% Source: Company, IIFL Research
In terms of end markets served, auto is the largest sector for TI, in terms of revenues, followed by industrial, railways and cycles. Exports form 15% of the overall revenues and are serving the overseas auto and industrial customers.
Figure 2: Auto contributed 56% of revenue in FY20; FY19 was 59% FY20 revenue breakup
Non Auto/Industrial 24% Auto 56% Railways 4%
Cycles 16%
Source: Company, IIFL Research
The company has multiple manufacturing facilities spread across the country, in order to be closer to customer manufacturing facilities, thus enabling faster turn-around times and Just-in-Time production.
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Figure 3: Manufacturing presence
Punjab (3) – Mohali & Rajpura Uttarakhand (2)
Haryana (1) - Bawal
Gujarat (1) – Sanand
Maharashtra Telengana (1) - Medak (2) – Shirwal & Pune
TPI
TICI
MFPD
Tamil Nadu (8)
Source: Company, IIFL Research. TPI – Tube products of India (Engineering segment), TICI – TI Cycles of India, MFPD – Metal formed product division
Figure 4: Tube Investments of India – Major milestones Year Major milestones 1949 TI Cycles of India established in collaboration with Tube Investments, UK 1959 Tube Products of India merged with TI Cycles of India to form Tube Investments of India 1960 TI Diamond Chains (TIDC) formed in collaboration with Diamond Chains USA 1965 TI Metal Forming was established as a division of Tube Investments 1969 TI Diamond Chains diversifies into industrial chains 1975 TIDC diversifies into heavy duty chains 1985 Diversification into engineering class chains and mfg. of bike chains 1990 Acquisition of Press Metal Corporation 1995 Setup of the fine blanking division for the auto sector 1996 Indigenously designed tube plant setup near Pune 1998 Sets-up new facility to make car door frames near Gurgaon 2001 Cycle manufacturing plant set up at Nashik, entry into financial services by purchasing 41.8% stake in Cholamandalam Investments and Finance 2004 TI Diamond Chains merged with TI India; metal forming division sets up mfg. facility in Gujarat for making door frames 2006 Hydro forming facility commissioned near Chennai to supply auto components 2010 Commissioned new plant at Sanand, Gujarat and Laksar, Uttarakhand 2017 Demerger of Tube Investment of India with the financial business into TI Financial Holdings 2019 New facility established at Rajpura, Punjab for high strength tubes and telescopic front fork products 2020 Made binding bid for acquisition of 58.58% stake in CG Power & Industrial Systems at Rs8bn Source: Company, IIFL Research
Tube Investments of India – BUY
Management structure Post the restructuring in FY17 and following the appointment of Vellayan Subbiah as the Managing Director a couple of years ago, the company has adopted a differentiated management structure. Each individual business has an independent operating CEO, apart from the MD and Group CFO. And each business is separately tracked on the key metrics of revenue growth, PBT margin, RoCE and FCF/PAT. The company has created 18 business units within the company, to further decentralise the management of operations. Figure 5: TII – Management profile Name Designation Brief Profile MM Murugappan Chairman MM Murugappan is a fourth-generation member of the Murugappa family and also the Executive Chairman of the Murugappa Group Corporate Advisory Board, since Feb 2018. Vellayan Subbiah Managing Director Part of the promoter family, he has over 23 years of experience in varied fields, viz. technology, projects and financial services. He was MD of Cholamandalam Investment & Finance Company, during 2010-17. Kalyan Kumar Paul President, TI Cycles He has over three decades of experience in managing domestic and international operations, and sales & marketing across diverse industries. He joined Tube Products of India in 2009 and has held various executive roles, including that of Sr. VP Strategy & New projects, Sr. VP Sales & Marketing and President Tube Products of India. Mukesh Ahuja EVP & Head Tube Products He has over two decades of experience in managing operations, strategy, business development and sales & marketing. KR Srinivasan President, metal formed He has over two and a half decades of experience in various functions, viz. division sales, marketing, application engineering, product management, manufacturing and other plant operations, process re-engineering, project management and information technology. K Mahendra Kumar EVP & CFO He has over 2 decades of experience in the finance function, having worked in diverse sectors such as chemicals, automotive, information technology, wind energy and elevators. Krishna Srinivas Sr. VP Corporate He has close to 30 years of experience covering Operations, Business and Technology Centre Engineering Management. He currently heads the Corporate Technology Centre, besides working on new business, new technology, new products and M&A opportunities. RB Selvakumar Sr. VP – HR He has over two decades of experience in HR & IR roles and has worked in different sectors like Textiles, Pharmaceuticals, Electronic Manufacturing Services (EMS) and Heavy Engineering. A Muthukumaran VP - Strategic Sourcing He has more than two decades of experience in handling functions such as Manufacturing, Corporate Quality Management Systems, Plant Head operations, growth projects, Sales & Marketing and Business Head for the Automotive Chains division. Source: Company, IIFL Research
Figure 6: The Murugappa Group − Presence across multiple sectors Sector Murugappa Group companies Agriculture Coromandel International, EID Parry, Parry Agro Engineering Carborundum Universal, Murugappa Morgan Thermal Ceramics, Shanti Gears, Tube Investments, Wendt India. Financial Cholamandalam Financial Holdings, Cholamandalam Investments, services Cholamandalam MS General Insurance Others Ambadi Enterprises, Chola MS Risk, Coromandel Engineering, Murugappa Organo Water Solutions, Parry Enterprises India, Parry Murray Source: Company, IIFL Research
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Figure 7: Murugappa Group – FY20 revenue and Ebitda contribution by companies
Others Others CUMI 2% CUMI 4% EID Parry EID Parry 7% 8% 6% 10% Chola MS Chola MS Gen Ins Gen Ins Coromandel 12% Revenues 5% 33% Ebitda of of Coromandel Rs54bn Rs381bn 34% CIFCL 23% CIFCL 32% Tube Inv Tube Inv 12% 12%
Source: Company, IIFL Research
Figure 8: Murugappa Group – Promoter family tree
Source: Company, IIFL Research
Tube Investments of India – BUY
Ingrained objectives driving improvement
Renewed focus on growth, margin, returns and cash flow Under the current management team, which was put in place post the restructuring in FY16, the company has intensified focus on four key financial metrics for each and every business that the company would continue or pursue. The metrics include: Focus on four key financial sales growth of over 17% metrics for each business with the targets ingrained PBT margin of 10% or more across the organisation till RoCE of 30% or more the shop floor level FCF/PAT of 85%
Importantly, along with prioritising these four metrics, the company has undertaken organisational restructuring to ensure that these targets are ingrained and understood across the organisation, till the shop floor level. The company has taken multiple steps to achieve this over the past four years which include: Decentralisation and empowerment – The company created 18 business units (BUs), with each business head focussing on growth and lowering the centre of gravity (freedom of decision making and responsibility), instead of only exercising control Project-based approach – Keeping to the Kaizen Mindset for driving improvements, the company formed >60 project teams for functions like logistics, procurement, scrap realisation, energy, fixed cost reduction, etc. These function across businesses to drive organisation-wide improvements.
Post the restructuring Such efforts have borne fruit for the company’s three largest and focus on key divisions/businesses, with improvements across the four parameters. matrices, RoCE has improved from 12.8% Overall company-level RoCE has improved, from 12.8% to 20.4% to 20.4% over the last over last four years. Healthy FCF has also supported deleveraging for four years the company, over the past four years.
Figure 9: Long-term revenue growth (Rs bn) Revenues (LHS) YoY growth (RHS) 70 40% 60 32% 30% 12% 50 13% 20% 8% 16% 40 4% 10% 6% 30 2% 2% 0% 20 -10% -18% 10 -20% - -27% -30% FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21ii FY22ii FY23ii
Source: Company, IIFL Research; Note: *FY13-16 is sum of current segments under operations
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Figure 10: Long term Ebit and margins (Rs bn) Ebit (LHS) Ebit margins (RHS) 7 10.9% 12.0% 10.1% 9.6% 6 10.0% 7.6% 5 6.8% 6.6% 8.0% 6.5% 6.0% 6.3% 4 5.7% 7.9% 6.0% 3 6 5 4.0% 2 4 5 3 3 3 3 3 1 3 3 2.0% - 0.0% FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21ii FY22ii FY23ii Source: Company, IIFL Research; Note: *the FY13-16 margins corresponding to current operational segments
Figure 11: RoCE has steadily improved post restructuring Consol. RoCE 25.0% 21.9% 19.6% 20.4% 20.0% 20.0%
13.8% 15.0% 12.8% 13.3% 12.4%
10.0% 4.8% 4.8% 5.0% 5.0%
0.0% FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21ii FY22ii FY23ii Source: Company, IIFL Research; Note: *gains from restructuring visible FY17 onwards
Figure 12: FCF and deleveraging over the past four years, post restructuring (Rs bn) FCF generation (LHS) ND/E (RHS) (x) 5 0.56 0.50 0.60 1 3 3 1 4 4 - 0.40
(5) 0.30 0.11 0.09 0.20 (15) (10) - (0.19) (15) (0.07) (0.20)
(20) (0.40) FY17 FY18 FY19 FY20 FY21ii FY22ii FY23ii
Source: Company, IIFL Research *excludes outflow towards CG Power stake acquisition
Allocating capital judiciously, across product segments In order to leverage the strong established manufacturing capabilities and solution-driven mindset, management has recognised the market opportunity and possible runway for various businesses. This is driving capital allocation in a more fruitful way for the company. For example, no new capital is being deployed towards
Tube Investments of India – BUY
internal combustion-based auto products, whereas more is being diverted towards opportunities in fine blanking, railways, etc, as well as towards tube product exports and large dia tubes where the longer-term outlook remains strong.
Capital is allocated Figure 13: Business growth potential key to additional capital allocation judicially with no capital deployed to internal combustion based auto products and diverted towards growth segments in fine blanking, railways, etc
Source: Company, IIFL Research
Detailed steps to realise the potential growth in terms of strengthening manufacturing capabilities have been well thought out and have seen implementation over the past few years. Management is looking at replicating the leanings to the new acquisition of CG Power as well.
Figure 14: Well thought out steps; gains from implementation visible in financials
Source: Company, IIFL Research
Tube Investments of India - BUY
Strengthening leadership in core operations
Direct play on domestic auto recovery
TI has established strong Strong product portfolio for most auto manufacturers leadership position in the Over the past several years, TI has built up strong leadership auto component segments with key products used in 2 position in the auto component segment for most of the products it wheeler and passenger manufactures and supplies through a combination of excellence in vehicles various aspects, including: An extensive product portfolio across tubes, tubular components, CRSS, fine blank products, PV door frames. Pan India manufacturing presence for closer integration with customers. Forming a strong, well-established and transparent relationship with OEMs, from the product-development phase itself. Well-developed supply chain and focussed, solution-based investment in R&D. Established infrastructure for handling new product development. Strong financial metrics.
The key products are used in 2-wheelers, 3-wheelers, passenger vehicles as well as commercial vehicles. With ~56% of consolidated revenues (75% for engineering products, 67% for metal formed products) linked to the auto segment, TI is a direct play on the recovery in auto volumes, domestically.
Figure 15: Both large segments have high dependence on auto market Engineering Metal formed product Auto Non 67% Non Auto Auto 25% 22%
Railwa Auto ys 75% 11%
Source: Company, IIFL Research
Figure 16: Growth for key products links follows volumes growth for 2W, PV and CVs FY17 FY18 FY19 FY20
Auto sector – Industry volume 2W industry volume growth 7.0% 15.0% 5.0% -18.0% PV industry volume growth 9.0% 8.0% 3.0% -18.0% CV industry volume growth 0.0% 13.0% 15.0% -32.0% Key products for TI
Tubes volume growth 9.0% 18.0% 12.0% -21.0% CRSS volume growth 6.1% 11.0% 2.0% -16.0% Automotive chain growth 0.7% 18.0% 6.0% -12.0% Doorframe volume growth 6.0% 6.0% 12.0% -16.0% Fine blanking volume growth 12.0% 29.0% 15.0% 2.0% Source: Company, SIAM, IIFL Research
Tube Investments of India – BUY
Figure 17: Engineering segment – Key products for 2Ws and passenger vehicles
Source: Company, IIFL Research
Figure 18: Large and high quality client base for engineering products segment
Source: Company, IIFL Research
Figure 19: Metal Formed rolled formed products for the auto business
Source: Company, IIFL Research
Tube Investments of India - BUY
Figure 20: Metal formed products –Chains and fine blanked products for auto market
Source: Company, IIFL Research
Figure 21: Key customers for rolled formed products
Figure 22: Key customers for auto chains
Figure 23: Key customers for fine blanking products
Source: Company, IIFL Research
Tube Investments of India – BUY
Supported by well-spread manufacturing capacities The leadership position is led by strong manufacturing capabilities across plants, all of which are close to customers’ manufacturing locations, thus ensuring seamless integration with just-in-time manufacturing linked to customers’ production schedules. TI is the only domestic company with multiple plants at four different locations catering its auto customers.
Figure 24: Each plant of TI located in proximity of large OEMs Business TI plant location Large OEMs facilities in proximity Engineering (ERW Tamil Nadu (Avadi, TVS Motors (Hosur), Yamaha (Kanchipuram), Hyundai (Sriperumbudur), Ashok Leyland Tubes, CDW Tiruttani) (Ennore, Sriperumbudur, Hosur) Tubes, Tubular Bajaj Auto (Waluj, Chakan), Volkswagen (Chakan), Mahindra (Igatpuri, Kandivali), Tata Maharashtra (Shirwal) components, Cold Motors (Pune), Ashok Leyland (Bhandara) rolled Steel Strips, Hero MotoCorp (Gurgaon, Dharuhera), TVS Motor (Nalagarh), Bajaj Auto (Pantnagar), Punjab (Mohali, Large Diameter Honda (Manesar), Yamaha (Faridabad), Maruti (Gurgaon, Manesar),Mahindra (Mohali, Rajpura) Tubes) Haridwar), Tata Motors (Pantnagar) Tamil Nadu (Ambattur, TVS Motors (Hosur), Yamaha (Kanchipuram), Hyundai (Sriperumbudur), Ashok Leyland Nemilichery) (Ennore, Sriperumbudur, Hosur) TVS Motors (Mysore), Toyota (Bidadi, Bengaluru), Mahindra (Bengaluru), Tata Motors Telangana (Medak) Metal formed (Dharwad) (Auto Chains, Fine HeroMotoCorp (Haridwar), Yamaha (Surajpur), Honda (Greater Noida), Mahindra Blanking, Uttarakhand (Haridwar), Tata Motors (Pantnagar), Ashok Leyland (Pantnagar) Doorframes, Railway Coaches, Hero MotoCorp (Gurgaon, Dharuhera), TVS Motor (Nalagarh), Bajaj Auto (Pantnagar), Industrial Chains) Haryana (Bawal) Honda (Manesar), Yamaha (Faridabad), Maruti (Gurgaon, Manesar),Mahindra (Mohali, Haridwar), Tata Motors (Pantnagar) HeroMotoCorp (Halol, Neemrana), Honda (Tapukara, Vithalpur), Mahindra (Vadodara, Gujarat (Sanand) Jaipur), Tata Motors (Sanand), Ashok Leyland (Alwar) Source: Company, IIFL Research
TI’s Rajpura plant commissioned in Nov-2019
The new Rajpura facility was commissioned in Nov-2019. Full-year benefits are likely to flow-in during FY21-22. The company has plans for further expansion in phase-2 as well. The plant has indigenously built an ERW mill for high-frequency welding. TI’s corporate technology centre aided in the building of the customised machine architecture at this facility. Key products include High Strength Tubes and Telescopic Front Forks. The facility addresses demand density, and provides customer proximity and better geographical balance for TI. A significant part of the demand in North is accommodated from this facility, thereby optimising logistics and lowering costs. It also provides additional headroom for catering for exports from coastal plants in South India.
TI is a preferred vendor of Bolstered with strong R&D capabilities, focus on product quality and safety critical components seamless delivery, TI has become the preferred vendor of safety for auto industry given strong focus on R&D, critical components for auto manufactures. Its leadership position product quality and and well-entrenched relationships with clients have ensured steady seamless delivery market-share gains for the company across large OEMs, traversing various products.
TI did see an impact of the slowdown in auto demand in FY20 revenues which is likely to exacerbate in 1HFY21, given the overall trend in auto-volume sales.
Tube Investments of India - BUY
Figure 25: Both segments impacted by slowdown in domestic auto demand (Rs m) Metal formed revenues Engineering revenues 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 - 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q FY19 FY20 FY21
Source: Company, IIFL Research
However, its wide presence across different segments means that TI is best-placed to benefit in the overall volume recovery for the auto segment. Our auto analyst is building-in volume growth of 25%, 23% and 76% for the 2W, PV and M&HCV segments for FY22ii. This should translate into revenue pickup for TI as well.
Figure 26: Domestic auto demand likely to normalise over FY22-23ii Volume growth (%) FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21ii FY22ii FY23ii Cars 3 -7 4 7 9 8 3 -18 -15 23 10 2Ws 3 7 8 3 7 15 5 -18 -15 25 10 3Ws 5 -11 11 1 -5 24 10 -9 -24 24 10 M&HCVs -23 -25 16 30 0 13 15 -42 -40 76 25 LCVs 14 -18 -12 0 8 25 19 -20 -25 36 15 Tractors -2 20 -13 -10 21 22 8 -10 3 8 8 Average 0 -6 2 5 7 18 10 -20 -19 32 13 Source: Company, IIFL Research
Auto industry volumes have witnessed a pull back by a decade, and our auto team expects strong rebound in FY22. Following the Covid-19 related disruption, IIFL expects 15%/15%/24%/40%/25% YoY decline in PVs/2Ws/3Ws/ MHCVs/LCVs, respectively during FY21ii. Given that the FY21 decline is on top of a sharp down-cycle in FY20, PV (cars) and 2W volumes in FY21 would be 30% below the FY19 peak, while FY21 MHCV volumes would be 1/3rd of the FY19 peak. PV volumes in FY21 would plunge back to the FY11 levels, while MHCV volumes in FY21 would be lower than the GFC levels. On this base, we forecast a sharp rebound in volumes, in FY22. IIFL expects strong As per IIFL estimates, PVs/2Ws/3Ws/MHCVs/LCVs are expected rebound in auto to grow 23%/25%/24%/76%/36% YoY during FY22ii. An volumes during FY22 economic recovery coupled with a favourable base should drive a strong upcycle in the auto sector over the next 2-3 years. This would support healthy volumes for domestic auto ancillaries and other dependent firms, including Tube Investments.
Investing to tap the aftersales market in the auto segment While slowdown in new-vehicle sales have impacted FY20 revenue growth for both, engineering and the metal formed products
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business, the company has tried to counter this hit through higher focus on after-sales market demand for spares. In the metal formed products business, auto chains, under the brand Diamond Chains, have seen healthy traction. Focus has been on innovative products such as chains for higher CC bikes as well as various types of innovative chains for standard segment bikes. The company also leveraged the multi-layered distribution infrastructure, to deepen its market presence.
Figure 27: TI is investing in its aftermarket chains brand and its distribution
Source: Company, IIFL Research
Tapping into the global auto supply chain
TI has increased its focus Given the leadership position in the core engineering business (ERW on tapping into the global tubes, CRSS and door frames) as well as in the overall auto volume auto supply chain to reduce dependence on domestic prospects, both on a domestic scale, management expects growth auto segment for these products to range between 5% and 15% over the medium- to-long term at the national level. This would clearly be below the target growth levels for any business.
To leverage its manufacturing prowess and diversify away from the domestic auto segment, the company has increased focus on exports of auto products. The past few years have seen the share of exports grow steadily.
Figure 28: Export revenue growth and share of consolidated revenue (Rs m) Export revenues (LHS) Export revenue share (RHS) 8,000 20.0% 7,000 6,000 15.0% 5,000 4,000 10.0% 3,000 2,000 5.0% 1,000 - 0.0% FY14 FY15 FY16 FY17 FY18 FY19 FY20 Source: Company, IIFL Research
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This is likely to accelerate, supported by fresh approvals from global OEMs. Majority of the exports, currently, are in the engineering segment, to customers in Europe, South East Asia and China. Metal formed products export growth is led by building new distributors and channel partners in Central America and SAARC.
Commissioning of the Commissioning of the Rajpura plant in Punjab, in Nov-2019, provides Rajpura plant allows the company significant headroom to increase focus on exports, as headroom to increase exports from its plants in this frees up capacity at the plants in Tamil Nadu, which have an Tamil Nadu added advantage of proximity to ports. The Rajpura plant has now been configured to meet the tighter specifications needed for the export markets.
Management highlights that the approval process for more products has already commenced, even as the company invests to garner the opportunities emerging from the Euro-6 changeover as well as from electric vehicles. Importantly, tighter specifications and lower competition will translate into higher margins vs the domestic auto business for TI’s engineering products. Additionally, management expects gains from the China Plus One strategy for global auto OEMs, post the supply-chain disruptions due to Covid-19.
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Healthy traction in non-auto business
Efforts on, to grow non-auto revenues for engineering and metal formed product Non auto businesses such Over the last four years, the company has seen steady growth in the as railways, large dia tubes non-auto business, including railway coaches and large dia tubes for have seen increased traction over the past few off-road vehicle applications. This has been a conscious choice by the years management for diversifying revenue streams to reduce dependence and, hence, the cyclicality from exposure to the auto sector.
In the engineering products segment, large dia tubes for construction equipment as well as tractors are the key offering. Opportunity in the large dia non-auto segment is due to import substitution, given only few competitive manufacturers domestically. Investment in R&D to develop products that meet specifications has been a key trend for the company in this segment.
Figure 29: Engineering products – Large diameter tubes for off-road applications
Source: Company, IIFL Research
Figure 30: Large dia tube volumes have seen steady increase since FY16
(tonnes) Large Dia tube volumes 50,000 44,989 45,000 40,000 35,425 33,292 35,000 30,000 25,000 21,733 20,000 15,303 15,000 10,000 5,000 - FY16 FY17 FY18 FY19 FY20
Source: Company, IIFL Research
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In the metal formed segment, the industrial chains business contributes meaningful revenues. Growth is led by demand from industries, including construction equipment, material handling, agricultural equipment, cement, power, conveyor manufacturers, food processing and multi-level car parking. Overall, growth here would be subdued but steady, and the company will likely benefit from the entrenched position with key large clients.
Figure 31: Metal Formed – Industrial chains’ product portfolio
Power transmission/conveying chains Agricultural chains Engineering class chains Source: Company, IIFL Research
Figure 32: Industrial chains – Key customers
Source: Company, IIFL Research
Figure 33: Industrial Chains have seen steady growth in the past two years Industrial chains growth 20.0% 19.0%
15.0%
10.0% 9.0% 10.0% 8.0%
5.0%
0.0% FY17 FY18 FY19 FY20 Source: Company, IIFL Research
Strong traction in railway coach building In the railways segment, while the company has been a supplier for decades, there has been steady uptick in the flow of orders for sections for railway coaches from the three Railway Coach factories over the past 3-4 years. Demonstration − of the latest technologies (robotic welding) in manufacturing − to railways has set new benchmarks for tendering, providing TI the lead in a not-so-crowded
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market. Also, dedicated manufacturing plants in close proximity to the Rail Coach factories have provided an advantage to the company.
Figure 34: Railway factory locations and TI plants for railways Railway factories TI plants catering for the Railways Integral Coach Factory, Chennai (Tamil Nadu) TI Metal Forming, Kakkalur Rail Coach Factory, Kapurthala (Punjab) TI Metal Forming - Uttarakhand Modern Coach Factory, Raebareli (UP) TI Metal Forming Uttarakhand Source: Company, IIFL Research
Figure 35: Metal formed products used in rail coaches
Source: Company, IIFL Research
TI’s railway business grew FY20 witnessed 49% YoY revenue growth for the railways business, 49% YoY in FY20 on supported by healthy coach build-out by the Indian Railways and TI’s healthy coach building by the Indian Railways leadership position in the segment. While the near term is uncertain due to stressed financials of railways, coach build-out plans remain strong, as per various releases by the government.
Figure 36: Coach build-out plan announced by the Indian Railways (IR) No. of coaches FY19* FY20* FY20R FY21* FY21R FY22* LHB 4,238 4,034 5,784 4,079 6,631 4,099 Self-propelled 1,729 1,856 2,192 2,405 1,765 2,546 Others 91 50 50 50 279 50 Total 6,058 5,940 8,026 6,534 8,675 6,695 Source: IR; Note: *original plan announced in Jan-19; R - revised production plan for respective years, announced later
Additionally, increase in domestic sourcing of train-sets, as announced for 44 Vande Bharat trains, will aid ordering for the TI railway business.
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Tender for 44 Vande Bharat trains The Indian Railways has floated the revised Tender of semi high- speed 44 Vande Bharat trains-sets. The Tender is for 3-phase Propulsion, Control and other Equipment, along with bogies for the trains-sets. The main features of the Tender are as under: Train-sets shall be manufactured at ICF/Chennai, RCF/Kapurthala and MCF/Raebareli It shall be a local (indigenous) tender A two-stage, reverse auction shall take place
The revised Tender is in line with Government of India’s preference for the Make in India policy; the minimum local content percentage has been revised to 75%. It is the first big tender under the revised DPIIT norms of AtmaNirbhar Bharat and has at least 75% domestic components. This tender is now a Domestic Tender, with only the companies registered in India eligible to apply, and would have to quote in Indian Rupees.
The company has also started supplying parts for metro train manufacturing in both, India and overseas. This has been a remunerative business with healthy return ratios, despite being a B2G (business-to-government) business.
Cycles – Turnaround on track
TI manufactures and markets a wide range of bicycles and accessories − from standard to premium − including performance bicycles for the fitness and adventure space.
Figure 37: Cycles − Key brands for TI
Source: Company, IIFL Research
It was a pioneer in the retail format of experiential stores – Track & Trail Urban, Track & trail Sport and BSA Hercules Rural outlets. It currently has ~225 Track & Trail stores across India. Its overall distribution network is spread across 8,500 dealers. It has an omni- channel presence, with unified in-store and online experience.
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Figure 38: Retail experience at Track & Trail
Source: Company, IIFL Research
Exit from the institutional The company enjoys a stronger position in the specials category, business in FY17 and high which has higher value addition, realisation and profitability focus on specials category has improved profitability compared with standard cycles. Differentiation through innovation for the cycles business has aided this, e.g. handles with integrated headlights, anti-slip chains, etc.
Figure 39: TI enjoys a larger share in the specials segment Share of specials for industry Share of specials for TI
72.0% 72.0% 72.0% 66.0% 60.0% 61.0% 63.0% 54.0%
FY17 FY18 FY19 FY20 Source: Company, IIFL Research; Note: Market share, as of Nov-2019
Figure 40: TI has 28% market share in the domestic cycles market Hero TI Atlas Avon Others
15% 17% 18% 18% 10% 10% 11% 12% 17% 16% 17% 7% 28% 27% 29% 23%
31% 28% 31% 35%
FY17 FY18 FY19 FY20 Source: ACMA, IIFL Research *FY20 market share as of Nov-2019
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Cycle market in India − Key facts
The domestic bicycles market is estimated at 16.3m units annually, with 63:37 split broadly, between the standard (roadster bikes for rural & urban) and specials (mountain bikes, performance bikes) segments. Historically, bicycle volumes have grown at low single-digit levels, although there has been an uptick post Covid-related disruptions. Low penetration levels vs global levels is an opportunity but lack of proper infrastructure is a key impediment. 60% of the cycle-demand originates from rural markets emphasising focus on wide distribution.
Overall, the cycles business, with revenue of Rs13.6bn and operating profit of Rs357m in FY17, was the smallest contributor to standalone profits. This along with a relatively higher working capital cycle meant that it was actually a drag on the overall return ratio and cash flows for the company, over the past few years.
However, under the new management, the company has been able to turn around the business through strategic steps such as exit from the institutional business, which meaningfully improved margins and RoICs.
Figure 41: Cycles business growth should rebound post exit from institutional business (Rs m) Cycle business revenues (LHS) YoY growth (RHS) 20,000 20.0% 10.0% 15,000 0.0% 10,000 -10.0% -20.0% 5,000 -30.0% - -40.0% FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21ii FY22ii FY23ii
Source: Company, IIFL Research
Figure 42: The Cycles business − Margins are picking up post cost rationalisation (Rs m) Cycle business Ebit (LHS) Ebit margins (RHS) 1,000 6.0% 5.3% 800 5.0% 4.4% 4.0% 3.5% 4.0% 600 2.9% 3.2% 3.0% 400 793 2.6% 2.5% 2.0% 578 1.2% 200 380 357 0.0% 257 1.0% 6 144 224 127 204 - 0.0% FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21ii FY22ii FY23ii Source: Company, IIFL Research
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Other significant steps and initiatives include: Rationalising of the product portfolio towards affordability/specialities. New product development through innovation has benefited overall revenue growth over FY19-20. Rationalisation of the cost structure to reduce breakeven volumes, from ~0.18m cycles annually to ~0.145m cycles. Streamlining and rationalising the distribution network through optimised warehousing. Consolidation of manufacturing footprint post commissioning of the 250,000-unit capacity Rajpura plant, as the company was able to close down the Nashik facility for bicycles. Investments in marketing and distribution, with steady increase in Track & trail stores. Leveraging rapid increase in internet penetration through its omni-channel strategy.
However, given the state of the market, management admits that these steps can only help the company cover some distance, in terms of growth potential, segment margins and RoICs. Further measures to meet overall company-level targets would involve playing on the manufacturing strength to tap newer markets. This will primarily be targeted towards generating volumes so as to sweat the assets, including the new Rajpura plant.
Shanti Gears – A steady performer
TI has presence in the gears manufacturing business through its 70.47%-owned subsidiary Shanti Gears. Acquired in 2012 for ~Rs4.64bn, Shanti Gear ranks among the leading industrial-gear manufacturers, with four factories and over 1,000 employees. The company’s operations are fully integrated with an in-house R&D team for design and engineering, in-house foundry, a fabrication and forging unit, comprehensive heat treatment facilities and an extensive tool room for manufacturing hobs and cutters.
Shanti Gears has differentiated itself as a leader in custom-made gears and loose gears, with ~70% of revenues being generated from customised products for industrial usage.
Figure 43: Key products for Shanti Gears
Source: Company, IIFL Research
Performance of the company has seen a steady improvement, especially in terms of improving return ratios, even as 2HFY20 was
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impacted by demand slowdown. Focus on market development and customer engagement has aided operations for the company.
Figure 44: Revenues for gear business should normalise in FY22-23ii (Rs m) Gears business revenues (LHS) YoY growth (RHS) 3,000 30.0% 25.0% 18.0% 2,500 20.0% 17.7% 2,000 10.0% 10.0% 11.6% 7.4% 1,500 -0.3% 0.3% 0.0% 1,000 -10.0% -25.0% 500 -20.0%
- -30.0% FY15 FY16 FY17 FY18 FY19 FY20 FY21ii FY22ii FY23ii Source: Company, IIFL Research
Figure 45: Margins and return ratios have been stable (Rs m) Gear business Ebitda margin (LHS) RoCE (RHS) 23% 25% 23% 22% 22% 14.6% 16.0% 14.0% 20% 17% 17% 14.3% 12.0% 15% 10.0% 10.6% 9.4% 8.0% 10% 8.3% 6.0% 4.0% 5% 3.8% 2.0% 0% 0.0% FY15 FY16 FY17 FY18 FY19 FY20 Source: Company, IIFL Research
Extending the strength in custom-built gears, the company has increased focus on product development for major global customers in priority sectors. Combined with cost optimisation, this should aid growth as well as profitability over FY22-23ii.
The company has also strengthened presence in the servicing and replacement segment of gears, under Shanti Rebuild. Service centres in strategic locations in the country helped sustain the competitive advantage for the company.
Keeping a VC mind-set to invest in new businesses
The new management is As highlighted earlier, post the restructuring in FY16, the new TI looking to diversify revenue management has shifted focus, to operate the business with an eye streams from new businesses with long term on four key financial metrics. And each business has been put on the growth potential with a VC path to meet these targets. The new management has also looked at mind-set possible avenues to diversify revenue streams from new businesses with long-term growth potential, so as to further leverage its strong manufacturing capabilities and improving balance-sheet position.
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Capital allocation to the new businesses will still be subject to the potential to meet or exceed the four key financial parameters, along with other parameters such as large market size, growth potential and low capital intensity. However, the company will look at new businesses with the viewpoint of a venture capitalist, i.e. only a few of the many businesses will succeed in a major way, and cover the losses in others, which do not succeed.
Figure 46: Well-set parameters for capital allocation to new business
Source: Company, IIFL Research
TMT bars, Truck body Under this framework, the company has forayed into some new building and optic lens are businesses over the past 3-4 years, following themes such as import the new businesses that TI has ventured into recently substitution and exports, auto electrification, unorganised to organised, and B2B to B2C. The company has tried to harvest adjacencies to begin with, so as to leverage on manufacturing capabilities and other synergies.
TMT bars – The company forayed into the manufacture and sale of TMT bars in strategic tie up with the Sakthi Group. Offering two products (500D TMT and 550D TMT bars), it has steadily grown the distribution network to 200 dealers in all districts of Tamil Nadu and has focussed on intensive brand-building and market promotion. The annual report highlights that TI Macho has gained recognition as a value brand with premium pricing in the commodity space. Truck body building – The company forayed Truck body building in 2018, under the unorganised to organised theme pitching 10-20% weight reduction and enhanced load capacity as the USPs. The company offers fixed side deck, high side deck and drop side deck for open haulage as well as regular and refrigerated load designs for closed haulage. While last year was tough amid slowing demand, there is a shift underway from the outsourcing model to captive operations across various locations country-wide. The adverse tax impact as against the unorganised market has been a key constraint in the segment. Optic lens – The company has identified vision products as a growth opportunity for the automotive industry. A plant to manufacture optical glass lens has been set up at a capex of Rs500m, along with a technology partner. As capabilities grow, this can be leveraged to climb the value chain and support other industries & sectors too.
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CG Power–Large step to diversify business
Acquisition of CG Power Tube Investments has taken a giant and bold step towards reducing would enable TI to diversify the share of exposure to the domestic auto industry and away from domestic auto industry and also strengthening its industrial manufacturing portfolio through the strengthen industrial acquisition of controlling stake in CG Power and Industrial Systems manufacturing portfolio (CG Power). TI management highlights reasonable valuation for a leading industrial product manufacturer with strong possibility to enhance revenue growth, improve profitability and drive capital efficiency as the key rationale for the acquisition.
The company is currently awaiting CCI approval for closure of the transaction by end-Oct/early-Nov 2020. TI will end-up owning a domestic franchise (primarily) with market-leading positions in motors and railway products, along with a strong product offering in transformers/switchgears. It also inherits the CG Power brand and, with non-compete on B2C products now over, will look to launch other products around the motors portfolio.
Figure 47: Detailed product portfolio and market share in FY19 Segment Key Products Est. Market size (Rs bn) Est. Market Share Position Peers EHV IT 6 21% # 2 GE, ABB, BHEL Surge Arresters 1 48% # 1 Oblum, Lamco Gas Circuit Breakers 8 26% # 2 GE, Siemens Switchgear MV Switchgear 23 13% # 4 ABB, Schneider, Siemens, HV GIS 2 5% # 2 Siemens, ABB S6 (VIs) 2 35% # 1 BEL, ABB Power 66 9% # 3 GE, TBEA Transformer Distribution 47 5% # 5 Voltamp, Tesla LT motors 38 34% # 1 ABB, Siemens Motors Large motors 10 17% # 2 Bhel, ABB FHP motors 8 29% # 1 Marathon, Lawkim AC traction motors 5 31% # 2 Bhel, Saini Propulsion Electrics 9 66% # 1 BHEL IGBT Propulsion System 15 17% # 5 BTIL, Bhel, ABB Railway products Loco transformer 5 22% # 3 ABB, Bhel Relays 1 59% # 1 AEW Point machines 1 60% # 1 Vossloh Carriage fans (BLDC) 1 40% # 1 Kanwar Source: Company, IIFL Research
Figure 48: CG Power’s domestic products portfolio (Rs bn) Market Size (FY19E) Est. Market Share Sales
Power - Transformers 113.0 8% 8 - Switchgears 54.4 15% 8 Industrial - Motors 55.4 30% 17 - Railways 36.3 34% 12 - Drives 14.5 7% 1 Source: Company, IIFL Research
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Given that most of its international operations are under liquidation, CG Power will be left with two main international operating entities − QEI (USA) and Drives & Automation (Sweden) − with aggregate revenue of ~EUR40m, as per Management.
Post completion of the transaction, CG Power will start off with fresh equity infusion of Rs8bn from TI (Rs6.5bn upfront, for controlling stake; Rs1.5bn in the form of warrants, of which 25% is upfront and the balance 75% has to be infused within 18 months for controlling stake of the 58.58% post-warrant conversion) and debt of Rs10bn (of which Rs2bn carries coupon of 0.01% for two years, and Rs1.5bn is against the CG House property in Worli, Mumbai).
Figure 49: Fund infusion and equity dilution proposed on acquisition Particulars No of shares (m) Price (Rs) Value (Rs m) Current equity shares 627
Fresh issuance (3QFY21) 643 8.56 5,500 Fresh issuance (3QFY21) 69 14.55 1,000 Warrants (18 months) 175 8.56 1,500 Total equity shares, post dilution 1,513 9.02 8,000 Total equity dilution 58.58%
Immediate fund infusion (3QFY21) 6,875
TI's shareholding, post dilution 58.58%
Source: Company, IIFL Research
In terms of targets, TI management indicated a 4-5 year revenue target of Rs50bn and PBT margin of 10%, even as FY21 would see further contraction in revenues primarily due to working capital issues. Ramp-up in the motors portfolio should be the fastest among peers, given that a competitive product offering helped CG Power retain market leadership despite little cash support over FY20-21. In our view, management guidance seems conservative, especially if the end-market growth bounces back faster than peers.
Figure 50: Segment-wise revenue in the recent past (Rs bn) Transformers, reactors 60 Switchgears, control 50 equip & others 40 Traction electronic, 30 industrial drives and SCADA 20 Electric motors, alternators and drives 10 Others 0 FY17 FY18 FY19 FY20E FY24 target
Source: Company, IIFL Research
Management also highlights its target, to be debt-free at the CG Power level over next 4-5 years, despite possible requirement of additional funding for working capital and capex. Resolution of contingent liabilities (especially regarding related-party transactions and corporate guarantees worth Rs9.5bn given to various international operations that are under bankruptcy proceedings in various markets) remains the key risk.
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Figure 51: Historical standalone performance for CG Power Rs bn FY17 FY18 FY19 FY20 Revenue
Power 27 28 23 11 Industrial 21 23 31 21 48 51 54 32
Ebit
Power 2.1 1.7 0.9 (0.6) Industrial 1.9 1.8 3.7 2.5 4.0 3.4 4.6 1.9
Ebit margin (%)
Power 7.7 6.0 3.8 (5.5) Industrial 9.1 7.7 12.0 12.0 16.9 13.6 15.8 6.5
Source: Company, IIFL Research
Key risk to generating value from the Rs8bn invested for acquisition is actual on-ground execution in a largely unrelated business for TI. Apart from the customer overlap in the Railways segment, where both TI and CG Power operate, the motors and transformer/switchgear businesses are completely distinct. Attracting talent for R&D, manufacturing and marketing/sales would be key to a successful turnaround.
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Financial Outlook & Valuations
TI has been able to improve Over the past four years ending FY20, all key metrics across the operating margins across three businesses have seen meaningful improvement, barring the businesses, lowered working capital and auto slowdown-led decline in revenue in FY20. The company has improved its RoICs and been able to improve operating margins across the three businesses; cash flows over the past it has lowered the working capital cycle, driving improvement in four years RoIC as well as cash-flows. The balance sheet is in a much stronger position vs. earlier.
Figure 52: Healthy performance across segments, over FY17-20 (Rs m) FY17 FY18 FY19 FY20 Revenues Cycles 13,587 13,085 12,395 7,812 Metal formed 13,449 13,986 16,081 16,348 Engineering 20,769 23,586 28,960 22,582 Gear products 2,038 2,188 2,408 2,416 Others & Elimination (1,641) (1,957) (2,114) (1,654) Total 48,202 50,888 57,731 47,504 Ebit Cycles 357 6 144 224 Metal formed 865 933 1,241 1,160 Engineering 1,458 1,749 2,537 2,644 Gear products 285 332 425 327 Others & Elimination 61 (133) 17 202 Total Incl JV income 3.025 2,887 4.363 4,556 RoCE* Cycles 12.3% 0.2% 6.5% 12.7% Metal formed 17.1% 17.1% 20.5% 18.7% Engineering 23.2% 26.4% 36.9% 41.4% Gear products 9.4% 10.6% 14.3% 14.6% Consol ROCE 13.8% 13.3% 19.6% 20.4% Source: Company, IIFL Research *RoCE on end of period Capital Employed
FY21 will see reversal to some extent, due to Covid-related disruption to the auto business (~65% of overall revenues) as well as to other businesses. The healthier balance sheet, combined with a strong group heritage, should ensure that TI emerges stronger, to harvest the emerging opportunities post the disruption.
Over the medium-to-long term post the easing of the ongoing disruption, we expect the company to benefit from revival in auto volumes, increased success in exports as well as turnaround of the cycles business. We, hence, expect consolidated revenue to bounce back almost entirely by FY22, and FY23 to witness 16% consolidated revenue growth in the existing business.
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Figure 53: Key assumptions for FY21/FY22ii/FY23ii Cycles Engineering Metal formed Gears
FY21ii
Revenue growth -35.0% -25.0% -25.0% -25.0% EBIT margin 2.5% 9.0% 6.0% 11.0% FY22ii
Revenue growth 15.0% 35.0% 35.0% 25.0% EBIT margin 3.5% 11.7% 7.5% 14.0% FY23ii Revenue growth 10.0% 20.0% 12.0% 18.0% EBIT margin 4.0% 12.5% 8.0% 15.0% Source: Company, IIFL Research
Figure 54: TI − Consolidated revenues trajectory (excluding CG Power) (Rs bn) Revenues (LHS) YoY growth (RHS) 70 40% 60 32% 30% 12% 50 13% 20% 8% 16% 40 4% 10% 6% 30 2% 2% 0% 20 -10% -18% 10 -20% - -27% -30% FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21ii FY22ii FY23ii
Source: Company, IIFL Research
Most segments the company operates in allow pass through for the key RM – steel lending stability to gross margins. Procurement efficiencies (done largely by engineering segment) will support some improvement here.
Consolidated Ebitda margin have seen a steady uptick over CY17-20 and we expect the trend to continue as overall volumes normalise and company continues to derive gains from cost control, improving efficiencies and operating leverage. Increasing share of revenue form exports, large dia tubes, fine blanking would also support overall margin trajectory for TI.
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Figure 55: Gradual improvement in Ebitda margins expected over FY22-23ii even as gross margins likely to remain stable Gross margin Ebitda margin 50.0% 45.0% 40.0% 45.3% 43.1% 44.0% 44.1% 35.0% 41.4% 40.0% 38.8% 30.0% 25.0% 20.0% 13.9% 12.2% 11.7% 13.3% 15.0% 9.0% 7.7% 9.4% 10.0% 5.0% 0.0% FY17 FY18 FY19 FY20 FY21ii FY22ii FY23ii Source: Company, IIFL Research
We estimate PAT cagr of 11% over FY20-23ii supported by 4% revenue cagr and Ebitda margin improvements. Faster and stronger recovery in auto as well as sharp ramp up in exports and railways will provide upsides to our estimates.
Figure 56: Consol. PAT growth to recover in FY22-23ii (excluding CG Power) (Rs bn) Consol. PAT (LHS) YoY growth (RHS) 5 100% 77.7% 4 80% 57.6% 4 60% 3 38.3% 40% 3 25.4% 7.9% 28.1% 20% 2 -10.1% 0% 2 -20.0% -20% 1 -28.8% 1 -46.3% -43.8% -40% - -60% FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21ii FY22ii FY23ii Source: Company, IIFL Research
We expect the RoCE to normalise by FY22-23ii, to levels similar to those in FY20. There is an upside potential here, if recovery in domestic auto is faster than estimated or if the company is able to take advantage of the integration in global auto supply-chains at an accelerated pace.
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Figure 57: Consolidated RoCE to improve in FY22, as margins recover Consol. RoCE 25.0% 21.9% 19.6% 20.4% 20.0% 20.0%
13.8% 15.0% 12.8% 13.3% 12.4%
10.0% 4.8% 4.8% 5.0% 5.0%
0.0% FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21ii FY22ii FY23ii Source: Company, IIFL Research
While RoE currently appears to be lower, it is largely due to higher cash balance on positive FCF generation. This cash will get utilised for funding of the CG power acquisition.
Figure 58: Return ratios to improve in FY22ii DuPont Analysis (x) FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21ii FY22ii FY23ii Ebit margin (Ebit/sales) 9.8 10.0 11.2 9.7 5.7 4.6 6.6 8.3 6.3 8.8 9.7 Interest burden (PBT/Ebit) 0.9 0.9 0.9 0.8 0.9 1.0 1.0 1.1 1.1 1.1 1.1 Tax effect (PAT/PBT) 0.7 0.7 0.7 0.7 0.8 0.7 0.6 0.8 0.8 0.7 0.7 Asset turnover (Sales/assets) 0.5 0.5 0.4 1.3 2.0 2.3 2.6 2.1 1.6 2.0 2.0 Leverage (Assets/Equity) 9.8 9.7 9.5 1.9 1.8 1.7 1.5 1.3 1.2 1.1 1.1 RoE 27.6 26.5 27.9 13.7 14.7 12.5 16.8 19.3 10.4 16.2 17.7 Source: Company, IIFL Research
TI management has highlighted that funding for Rs8bn infusion in CG Power would be done so as to minimise debt burden on TI. Depending on the final funding pattern, the company’s balance sheet will get levered up (not built in estimates currently), but healthy cash generation from existing operations means that over the next 2-3 years, this debt can also be settled.
Figure 59: Steady FCF generation to drive faster deleveraging (excluding CG Power) (Rs bn) FCF generation (LHS) ND/E (RHS) (x) 5 0.56 0.50 0.60 1 3 3 1 4 4 - 0.40
(5) 0.30 0.11 0.09 0.20 (15) (10) - (0.19) (15) (0.07) (0.20)
(20) (0.40) FY17 FY18 FY19 FY20 FY21ii FY22ii FY23ii
Source: Company, IIFL Research
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Valuations – Not cheap, but not expensive either
We arrive at our target price of Rs680, based on the sum-of-the- parts valuation for TI’s existing operations and the value for its investment in CG Power.
Figure 60: TI India – SoTP-based valuations Particulars FY23 EPS (Rs) 22.4 PER (x) 24.0 Equity value per share (Rs) 537 Per share value of CG Power’s stake (Rs) 144 Total value (Rs/share) 680 No of shares (m) 188 Source: Company, IIFL Research
The existing consolidated operations across the four segments are valued at 24x FY23ii PER. This is a slight premium to average FY22 PER for peers in the auto component industry. While valuations are at a premium to historical valuations, demonstrated improvement across key metrics traversing key businesses lends comfort.
Figure 61: TI – Comparative valuations summary Market ND/E Revenue Ebitda EPS Company P/E (x) EV/Ebitda (x) P/B (x) RoE (%) Cap (x) Cagr Cagr Cagr FY20- (Rs m) FY20 FY21ii FY22ii FY20 FY21ii FY22ii FY20 FY21ii FY22ii FY20 FY21ii FY22ii FY20 FY20-22ii FY20-22ii 22ii Tube Investments* 113,867 34.0 64.1 34.0 20.1 28.5 18.6 6.6 6.2 5.5 20.9 10.7 17.2 0.1 -1.8% 2.6% 0.0% Pennar Industries 2,253 4.2 NA 5.5 3.4 6.5 3.4 0.3 0.3 0.3 7.8 (2.3) 6.0 0.5 -0.2% -1.0% -8.6% Motherson Sumi 363,604 31.1 54.8 19.7 9.2 12.3 7.6 3.2 3.2 2.9 10.5 5.0 15.0 0.7 3.7% 10.3% 24.8% Endurance Technologies 158,485 28.0 38.4 25.6 13.5 16.0 12.3 5.3 4.8 4.2 20.3 12.9 16.9 (0.1) 4.5% 4.7% 4.4% Minda Industries 91,123 62.8 94.4 30.6 16.4 19.7 12.6 4.9 4.6 4.0 8.8 4.0 13.4 0.4 10.1% 14.4% 41.0% Sundaram Fasteners 84,860 26.0 39.2 21.5 16.0 19.6 13.1 4.3 4.0 3.4 16.8 12.7 18.3 0.4 4.9% 10.6% 12.1% Source: Bloomberg, IIFL Research; Note: * IIFL estimates
Figure 62: Tube Investments – historic P/E chart
12m fwd PE Avg +/- 1SD
52.0 (x)
44.0
36.0
28.0
20.0
12.0 Nov-17 May-18 Dec-18 Jul-19 Feb-20 Sep-20
Source: Bloomberg, IIFL Research
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For CG Power, we assume that management expectation of Rs50bn revenue and 10% PBT margin is achieved by FY25, instead of a shorter time-frame. We ascribe 20x multiple to FY25 PAT (post 25.2% applicable tax-rate); then discount is back to two years, to FY23, at 12% discount rate. The 20x multiple is at a discount to the PE other capital-goods peers trade at primarily due to issues surrounding contingent liabilities worth ~Rs9.47bn as well as other potential issues relating to earlier promoters of CG Power. Excluding the Rs8bn investment by TI, this translates into per-share value of Rs144 for TI.
Figure 63: CG Power − Valuations summary CG Power (Rs m) Investment 8,000 Stake 58.58% FY25 revenue - CGPIS 50,000 FY25 PAT @7.5% margin 3,750 Multiple (x) 20 Total Equity value for CG Power in FY25 75,000 TI stake discounted to FY23 @12% discount rate 27,025 Value per share for TI (Rs) 144 Source: Company, IIFL Research
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Company snapshot Background: As part of the large and diversified Murugappa Group, Tube Investment Holdings is mobility focused manufacturing company with a strong established franchise across auto and industrial sectors. The company has been in business since 1959 continuously building on the growing engineering prowess. It came into its current form from FY17 post the restructuring wherein the financial service business was separated into TI Financial Holdings. It operates across three business segments in the standalone entity (Engineering, Metal Formed Products and Cycles) and also has a few more investments / joint ventures for additional products.
Revenue split - (FY20) EBIT split - FY20 Cycles, Cycles, 16.0% 5.0% Gears, 8.0% Gears, 5.0% Engineeri ng, 46.0% Engineeri Metal ng, Metal formed, 61.0% formed, 27.0% 33.0%
/ P/E EV/Ebitda #N/A 12m fwd PE Avg +/- 1SD (Rs) 12m fwd EV/EBITDAPrice TP/RecoAvg changed date +/- 1SD 800 700 60030.0 52.0 (x) 500 (x) 40027.0 300 44.0 20024.0 100 21.00
36.0 18.0
Jul-19 Jul-18 Jul-20
Jan-18 Jan-19 Jan-20
Sep-18 Sep-19 Sep-20
Nov-17 Nov-18 Nov-19
Mar-18 Mar-19 Mar-20
May-19 May-20 28.0 15.0 May-18 12.0 20.0 9.0 12.0 6.0 Nov-17 May-18 Dec-18 Jul-19 Feb-20 Sep-20 Nov-17 May-18 Dec-18 Jul-19 Feb-20 Sep-20
Assumptions Management Y/e 31 Mar, Consolidated FY19A FY20A FY21ii FY22ii FY23ii Name Designation Revenue growth M M Murugappan Chairman Cycle and accessories (5.3) (37.0) (35.0) 15.0 10.0 Vellayan Subbiah MD Engineering 22.8 (22.0) (25.0) 35.0 20.0 K Mahendra Kumar EVP & CFO Metal formed products 15.0 1.7 (25.0) 35.0 12.0
Gears and gear products 10.0 0.3 (25.0) 25.0 18.0 Source: Company, IIFL Research
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Financial summary Income statement summary (Rs m) Y/e 31 Mar, Consolidated FY19A FY20A FY21ii FY22ii FY23ii Revenues 57,748 47,504 34,848 45,846 53,193 Ebitda 5,447 5,785 4,086 6,088 7,371 Depreciation and amortisation (1,616) (1,853) (1,900) (2,050) (2,200) Ebit 3,831 3,932 2,186 4,038 5,171 Non-operating income 532 623 550 600 650 Financial expense (528) (304) (240) (135) (80) PBT 3,835 4,252 2,496 4,503 5,741 Exceptionals 30 (220) (150) 0 0 Reported PBT 3,865 4,032 2,346 4,503 5,741 Tax expense (1,268) (899) (601) (1,153) (1,470) PAT 2,597 3,133 1,746 3,350 4,271 Minorities, Associates etc. (89) 0 0 0 0 Attributable PAT 2,508 3,133 1,746 3,350 4,271
Ratio analysis Y/e 31 Mar, Consolidated FY19A FY20A FY21ii FY22ii FY23ii Per share data (Rs) Pre-exceptional EPS 13.2 17.8 10.1 17.8 22.7 DPS 2.5 3.5 4.2 4.2 4.2 BVPS 78.6 92.3 97.1 110.3 128.5 Growth ratios (%) Revenues 15.5 (17.7) (26.6) 31.6 16.0 Ebitda 42.0 6.2 (29.4) 49.0 21.1 EPS 55.9 35.1 (43.5) 76.7 27.5 Profitability ratios (%) Ebitda margin 9.4 12.2 11.7 13.3 13.9 Ebit margin 6.6 8.3 6.3 8.8 9.7 Tax rate 32.8 22.3 25.6 25.6 25.6 Net profit margin 4.5 6.6 5.0 7.3 8.0 Return ratios (%) ROE 18.0 20.9 10.7 17.2 19.0 ROCE 19.8 20.4 12.3 20.5 23.4 Solvency ratios (x) Net debt-equity 0.3 0.1 0.1 (0.1) (0.2) Net debt to Ebitda 0.8 0.3 0.4 (0.2) (0.6) Interest coverage 7.3 12.9 9.1 29.9 NM Source: Company data, IIFL Research
Tube Investments of India – BUY
Balance sheet summary (Rs m)
Y/e 31 Mar, Consolidated FY19A FY20A FY21ii FY22ii FY23ii
Cash & cash equivalents 1,657 1,795 847 2,506 5,660
Inventories 8,148 5,586 4,296 5,275 6,121
Receivables 6,806 5,246 4,296 5,275 6,121
Other current assets 954 990 726 955 1,108
Creditors 9,614 6,959 4,296 6,657 7,724
Other current liabilities 1,928 1,616 1,186 1,560 1,810
Net current assets 6,023 5,041 4,684 5,795 9,477
Fixed assets 11,785 12,531 12,631 12,581 12,381
Intangibles 3,192 3,200 3,200 3,200 3,200
Investments 228 442 442 442 442
Other long-term assets 1,049 1,119 1,119 1,119 1,119
Total net assets 22,277 22,333 22,075 23,136 26,618
Borrowings 6,079 3,714 2,500 1,000 1,000
Other long-term liabilities 1,444 1,282 1,332 1,402 1,472
Shareholder ’s equity 14,754 17,337 18,243 20,734 24,146
Total liabilities 22,277 22,333 22,075 23,136 26,618
Cash flow summary (Rs m)
Y/e 31 Mar, Consolidated FY19A FY20A FY21ii FY22ii FY23ii
Ebit 3,831 3,932 2,186 4,038 5,171
Tax paid (1,228) (899) (601) (1,153) (1,470)
Depreciation and amortization 1,616 1,853 1,900 2,050 2,200
Net working capital change 500 1,119 (590) 548 (527)
Other operating items (242) (280) 310 465 570
Operating cash flow before 4,477 5,725 3,206 5,948 5,944 interest
Financial expense (528) (304) (240) (135) (80)
Non -operating income 532 623 550 600 650
Operating cash flow after interest 4,481 6,045 3,516 6,413 6,514
Capital expenditure (1,942) (2,199) (2,000) (2,000) (2,000)
Long -term investments 94 (214) 0 0 0
Others 26 (340) (460) (465) (570)
Free cash flow 2,660 3,291 1,056 3,948 3,944
Equity raising 0 0 0 0 0
Borrowings (1,685) (2,365) (1,214) (1,500) 0
Dividend (657) (789) (789) (789) (789)
Net chg in cash and equivalents 318 138 (948) 1,659 3,155
Source: Company data, IIFL Research
Tube Investments of India - BUY
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Tube Investments of India – BUY
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Name, Qualification and Certification of Research Analyst: Anupam Gupta(PGDBM), Urvil Bhatt, CFA(Chartered Accountant)
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Key to our recommendation structure
BUY - Stock expected to give a return 10%+ more than average return on a debt instrument over a 1-year horizon.
SELL - Stock expected to give a return 10%+ below the average return on a debt instrument over a 1-year horizon.
Add - Stock expected to give a return 0-10% over the average return on a debt instrument over a 1-year horizon.
Reduce - Stock expected to give a return 0-10% below the average return on a debt instrument over a 1-year horizon.
Distribution of Ratings: Out of 229 stocks rated in the IIFL coverage universe, 106 have BUY ratings, 10 have SELL ratings, 85 have ADD ratings and 27 have REDUCE ratings
Price Target: Unless otherwise stated in the text of this report, target prices in this report are based on either a discounted cash flow valuation or comparison of valuation ratios with companies seen by the analyst as comparable or a combination of the two methods. The result of this fundamental valuation is adjusted to reflect the analyst’s views on the likely course of investor sentiment. Whichever valuation method is used there is a significant risk that the target price will not be achieved within the expected timeframe. Risk factors include unforeseen changes in competitive pressures or in the level of demand for the company’s products. Such demand variations may result from changes in technology, in the overall level of economic activity or, in some cases, in fashion. Valuations may also be affected by changes in taxation, in exchange rates and, in certain industries, in regulations. Investment in overseas markets and instruments such as ADRs can result in increased risk from factors such as exchange rates, exchange controls, taxation, and political and social conditions. This discussion of valuation methods and risk factors is not comprehensive – further information is available upon request.
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