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Tube Invest.: Slowdown takes toll

May 15, 2013

Tube Investments of India (TII) announced the fourth quarter results of financial year 2012-2013 (4QFY13). The company reported a 10% YoY and 64% YoY drop in revenues and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues fall by 10% YoY during 4QFY13 largely due to the slowdown witnessed across segments.
  • Operating margins fall by 3.2% YoY to 7.6% during 4QFY13 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 64% YoY.

Standalone financial snapshot
(Rs m) 4QFY12 4QFY13 Change FY12 FY13 Change
Net sales 8,844 7,982 -9.7% 34,898 34,074 -2.4%
Expenditure 7,889 7,376 -6.5% 31,230 31,127 -0.3%
Operating profit (EBDITA) 955 607 -36.4% 3,668 2,947 -19.6%
EBDITA margin (%) 10.8% 7.6%   10.5% 8.6%  
Other income 158 219 38.6% 310 403 30.0%
Interest expense/(income) 204 291 42.8% 766 1,042 36.1%
Depreciation/ Amortisation 198 220 11.0% 761 798 4.9%
Profit before tax 710 314 -55.8% 2,451 1,510 -38.4%
Exceptional items - -   - (38)  
Tax 133 106 -20.4% 650 433 -33.5%
Profit after tax/(loss) 578 209 -63.9% 1,801 1,040 -42.3%
Net profit margin (%)       5.2% 3.1%  
No. of shares (m)       475.1 475.1  
Diluted earnings per share (Rs)*         2.2  
Price to earnings ratio (x)*         74.6  
(* on trailing twelve months earnings)

What has driven performance in 4QFY13?
  • Tube's revenues fell by 10% 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 9% YoY largely due to lower trade and institution volumes. The Engineering division recorded a decline of 4% YoY. In this, volumes of tubes fell by 2% YoY, while those of cold rolled steel strips fell by 3% YoY. This division was impacted on account of poor volumes of two wheelers and commercial vehicles (CVs). Having said that, tubular components continued to enjoy good patronage from its customers and managed to grow by 6% YoY. As far as the metal formed products division is concerned, revenues declined by 20% YoY. This was largely due to the drop in doorframes volumes, industrial chains and railway wagons.

    Standalone cost break-up...
    (Rs m) 4QFY12 4QFY13 Change FY12 FY13 Change
    Raw materials 5,485 4,691 -14.5% 16,195 16,153 -0.3%
    % sales 62.0% 58.8%   46.4% 47.4%  
    Staff cost 641 674 5.1% 1,923 2,065 7.4%
    % sales 7.3% 8.4%   5.5% 6.1%  
    Other expenditure 1,850 1,678 -9.3% 5,223 5,533 5.9%
    % sales 20.9% 21.0%   15.0% 16.2%  
    Total expenses 7,976 7,043 -11.7% 23,341 23,752 1.8%

  • Tube's operating profits fell by 36% YoY during the quarter, as operating margins shrunk by 3.2% YoY to 7.6%. This was on the back of higher staff costs and other expenditure (as a percentage of sales). Staff costs stood at 8.4% of the company's revenues for 4QFY13 as compared to 7.3% in 4QFY12. Further, margin pressures for each of the business segments also took its toll on overall margins.

  • Poor performance at the operating level coupled with higher interest costs led to the 64% YoY plunge in net profits. Interest costs were higher on account of the full impact of borrowings done in the earlier quarters.

What to expect?
At the current price of Rs 157, the stock trades at a multiple of 12.8 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. Conditions are expected to remain subdued during the first half of FY14 but it is expected that the scenario should improve thereafter. 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. Margins have come under pressure in recent times on account of the overall weakness. But the company has been focusing on value added products which have the potential to expand margins from a longer term perspective. Overall, we recommend that investors 'Hold' on to the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow suggested asset allocation and that no single stock comprises 5% of your portfolio.

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