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Tube Invest.: Profits ramp up - Views on News from Equitymaster

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Tube Invest.: Profits ramp up
Mar 19, 2014

Tube Investments of India (TII) announced the third quarter results of financial year 2013-2014 (3QFY14). The company reported a 9% YoY and 106% YoY growth in revenues and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grow by 9% YoY during 3QFY14 led by the engineering and metal formed products divisions.
  • Operating margins expand by 1.2% YoY to 9.1% during 3QFY14 on the back of lower raw material costs (as a percentage of sales).
  • While operating profits grow by 26% YoY, growth in net profits (excluding extraordinary items) is higher at 36% YoY on account of the benign rise in both depreciation charges and interest costs.

Standalone financial snapshot
(Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Net sales 7,650 8,337 9.0% 26,092 25,239 -3.3%
Expenditure 7,043 7,574 7.5% 23,752 22,951 -3.4%
Operating profit (EBDITA) 607 763 25.7% 2,340 2,288 -2.2%
EBDITA margin (%) 7.9% 9.1%   9.0% 9.1%  
Other income 32 22 -32.4% 184 154 -16.3%
Interest expense/(income) 302 326 7.8% 751 940 25.3%
Depreciation/ Amortisation 196 200 2.0% 577 595 3.0%
Profit before tax 141 259 83.2% 1,196 907 -24.2%
Exceptional item (38) -   (38) -  
Tax 28 105 270.3% 327 270 -17.4%
Profit after tax/(loss) 75 154 105.6% 831 637 -23.4%
Net profit margin (%) 1.0% 1.8%   3.2% 2.5%  
No. of shares (m)       186.6 186.8  
Diluted earnings per share (Rs)*         4.5  
(* on trailing twelve months earnings)

What has driven performance in 3QFY14?
  • Tube's revenues grew by 9% YoY during the quarter largely led by the engineering and metal formed products divisions. The bicycle division's revenues grew by 4% YoY. The Engineering division recorded 12% YoY growth in revenues. In this, volumes of tubes grew by 7% YoY, while those of cold rolled steel strips grew by 12% YoY. As far as the metal formed products division is concerned, revenues grew by 12% YoY. While the doorframes and railway segments did poorly, domestic volumes of automotive chains increased by more than 30% YoY and volumes to the replacement market grew by more than 25% YoY. Doorframes witnessed a drop in volumes on account of the overall weakness in the auto industry as well as the temporary suspension of Tavera. Railway wagons saw a 76% YoY fall in volumes.

    Standalone cost break-up...
    (Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
    Raw materials 4,691 4,970 6.0% 16,153 15,183 -6.0%
    % sales 61.3% 59.6%   61.9% 60.2%  
    Staff cost 674 746 10.7% 2,065 2,265 9.7%
    % sales 8.8% 9.0%   7.9% 9.0%  
    Other expenditure 1,678 1,858 10.7% 5,533 5,502 -0.6%
    % sales 21.9% 22.3%   21.2% 21.8%  
    Total expenses 7,043 7,574 7.5% 23,752 22,951 -3.4%

  • Tube's operating profits grew by 26% YoY during the quarter, as operating margins improved by 1.2% YoY to 9.1%. This was on the back of lower raw material costs (as a percentage of sales). As far as margins for each of the business segments is concerned, those for the bicycles division were slightly better than what it was in the same period last year. Those for the engineering and metal formed products divisions improved led by better internal efficiencies and cost reduction.

  • While operating profits grow by 26% YoY, growth in net profits (excluding extraordinary items) was higher at 36% YoY on account of the benign rise in both depreciation charges and interest costs.
What to expect?
At the current price of Rs 172, the stock trades at a multiple of 18.5 times our estimated FY16 earnings per share on a standalone basis (not including the subsidiaries). 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. Conditions are expected to remain subdued during FY14 but it is expected that the scenario should improve FY15 onwards. From a long term perspective though, the sector is expected to record good growth rates. 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 been focusing on value added products which have the potential to expand margins from a longer term perspective. Overall, our view is that investors Hold on to the stock.

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