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Tube Invest.: Slowdown impact continues - Views on News from Equitymaster
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Tube Invest.: Slowdown impact continues
Aug 7, 2013

Tube Investments of India (TII) announced the first quarter results of financial year 2013-2014 (1QFY14). The company reported a 10% YoY and 58% YoY drop in revenues and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues fall by 10% YoY during 1QFY14 largely due to the slowdown witnessed across segments.
  • Operating margins fall by 1.2% YoY to 8.7% during 1QFY14 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 58% YoY.

Standalone financial snapshot
(Rs m) 1QFY13 1QFY14 Change
Net sales 9,148 8,261 -9.7%
Expenditure 8,241 7,541 -8.5%
Operating profit (EBDITA) 907 720 -20.6%
EBDITA margin (%) 9.9% 8.7%  
Other income 32 11 -64.8%
Interest expense/(income) 197 304 54.8%
Depreciation/ Amortisation 189 192 1.9%
Profit before tax 554 236 -57.5%
Tax 170 73 -57.4%
Profit after tax/(loss) 384 163 -57.6%
Net profit margin (%) 4.2% 2.0%  
No. of shares (m) 475.1 475.1  
Diluted earnings per share (Rs)*   1.7  
(* on trailing twelve months earnings)

What has driven performance in 1QFY14?
  • 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 8% YoY largely due to the 7% YoY drop in volumes. The Engineering division recorded a decline of 7% YoY in revenues. In this, volumes of tubes fell by 5% YoY, while those of cold rolled steel strips fell by 2% YoY. This division was impacted on account of poor volumes of two wheelers and commercial vehicles (CVs). As far as the metal formed products division is concerned, revenues declined by 16% YoY. This was largely due to the drop in doorframes volumes and railway wagons. Doorframe volumes registered a drop of 12% YoY mainly due to the negative growth in the passenger cars segment. Products for the railway segment witnessed a 69% YoY drop in volumes due to delay in release of orders to the wagon builders from Railways.

    Standalone cost break-up...
    (Rs m) 1QFY13 1QFY14 Change
    Raw materials 5,671 5,011 -11.7%
    % sales 62.0% 60.7%  
    Staff cost 673 744 10.6%
    % sales 7.4% 9.0%  
    Other expenditure 1,897 1,787 -5.8%
    % sales 20.7% 21.6%  
    Total expenses 8,241 7,541 -8.5%

  • Tube's operating profits fell by 21% YoY during the quarter, as operating margins shrunk by 1.2% YoY to 8.7%. This was on the back of higher staff costs and other expenditure (as a percentage of sales). Staff costs stood at 9% of the company's revenues for 1QFY14 as compared to 7.4% in 1QFY13. 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 58% 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 134, the stock trades at a multiple of 10.9 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.

As far as Shanthi Gears is concerned, Tube Investments has been working on streamlining the former's operations and increasing capacity utilization. These efforts are expected to yield the desired results going forward. The stock price of the company has fallen in recent times and we now have a 'Buy' view on the stock from a 2-3 year perspective.

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