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Tube Invest.: All segments suffer
Feb 18, 2013

Tube Investments of India (TII) announced the third quarter results of financial year 2012-2013 (3QFY13). The company reported a 13% YoY and 72% YoY drop in revenues and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues fall by 13% YoY during 3QFY13 largely due to the slowdown witnessed across segments.
  • Operating margins fall by 1.4% YoY to 7.9% during 3QFY13 on the back of higher staff costs and other expenditure (as a percentage of sales).
  • Fall in operating profits coupled with higher interest costs takes its toll on the bottomline which plunges 72% YoY. Excluding the extraordinary loss during 3QFY13, bottomline declines by 58% YoY.

Standalone financial snapshot
(Rs m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
Net sales 8,792 7,650 -13.0% 26,054 26,092 0.1%
Expenditure 7,976 7,043 -11.7% 23,341 23,752 1.8%
Operating profit (EBDITA) 816 607 -25.7% 2,713 2,340 -13.7%
EBDITA margin (%) 9.3% 7.9%   10.4% 9.0%  
Other income 9 32 244.7% 152 184 21.0%
Interest expense/(income) 193 302 56.5% 562 751 33.6%
Depreciation/ Amortisation 198 196 -0.9% 562 577 2.7%
Profit before tax 435 141 -67.5% 1,741 1,196 -31.3%
Exceptional items - (38)   - (38)  
Tax 164 28 -82.7% 517 327 -36.8%
Profit after tax/(loss) 272 75 -72.4% 1,223 831 -32.1%
Net profit margin (%)       4.7% 3.2%  
No. of shares (m)       475.1 475.1  
Diluted earnings per share (Rs)*         3.0  
Price to earnings ratio (x)*         55.1  
(* on trailing twelve months earnings)

What has driven performance in 3QFY13?
  • Tube's revenues fell by 13% YoY during the quarter on the back of subdued conditions in the auto and industrial sectors. In terms of business segments, the bicycle division's revenues fell by 23% YoY largely due to lower trade and institution volumes. The Engineering division recorded a decline of 7% YoY. The demand for tubes and cold rolled steel strips was impacted on account of poor volumes of two wheelers and commercial vehicles (CVs). However, the tubular components segment grew by 8% due to continued focus on value added products. As far as the metal formed products division is concerned, revenues declined by 2% YoY. This was largely due to the drop in doorframes volumes and railway wagons. The former was due to lower production of cars that the division caters too. The latter was due to delay in tender process as well as severe price pressure on account of competition.

    Standalone cost break-up...
    (Rs m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
    Raw materials 5,485 4,691 -14.5% 16,195 16,153 -0.3%
    % sales 62.4% 61.3%   62.2% 61.9%  
    Staff cost 641 674 5.1% 1,923 2,065 7.4%
    % sales 7.3% 8.8%   7.4% 7.9%  
    Other expenditure 1,850 1,678 -9.3% 5,223 5,533 5.9%
    % sales 21.0% 21.9%   20.0% 21.2%
    Total expenses 7,976 7,043 -11.7% 23,341 23,752 1.8%

  • Tube's operating profits fell by 26% YoY during the quarter, as operating margins shrunk by 1.4% YoY to 7.9%. This was on the back of higher staff costs and other expenditure (as a percentage of sales). Staff costs stood at 8.8% of the company's revenues for 3QFY13 as compared to 7.3% in 3QFY12. Further, severe power cuts in Tamil Nadu and Andhra Pradesh (where a large part of the production takes place) had an impact on volumes and consequently margins.

  • Poor performance at the operating level coupled with higher interest costs led to the 72% YoY plunge in net profits. Although the company did not make any fresh borrowings during the quarter, interest costs were higher on account of the full impact of borrowings done in the earlier quarters. Further, the company had an extraordinary loss during the quarter of Rs 38 m due to the winding up of its subsidiary in China. Excluding this, the bottomline declined by 58% YoY.

What to expect?
At the current price of Rs 163, the stock trades at a multiple of 11.3 times our estimated FY15 earnings per share on a standalone basis. The auto and auto ancillary industry has been facing headwinds in recent times in the form of moderation in demand, high interest rates and firm raw material prices. Having said that, these are near term concerns and the sector is expected to record good growth rates from a long term perspective. Given that TII's fortunes are in large part determined by the prospects of the auto sector, a strong growth in the latter will certainly bode well for the company as well. The company has also been focusing on value added products which have to potential to expand margins. As far as Shanthi Gears is concerned, a new board, CEO and Executive Director has been appointed for this company and the process of integration is still going on. After the open offer, Tube Investments now holds 70.12% stake in Shanthi Gears. Based on the 9mFY13 performance of Tube Investments, we will have to revise our estimates downwards for the full year. Thus, overall, we recommend that investors 'Hold' on to the stock.

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