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Tube Invest.: Interest costs mar profits
Nov 7, 2013

Tube Investments of India (TII) announced the second quarter results of financial year 2013-2014 (2QFY14). The company reported a 7% YoY and 14% YoY drop in revenues and net profits respectively. Here is our analysis of the results.

Performance Summary
  • Revenues fall by 7% YoY during 2QFY14 largely due to the slowdown witnessed across segments.
  • Operating margins expand by 0.4% YoY to 9.3% during 2QFY14 on the back of lower raw material costs (as a percentage of sales).
  • While operating profits fall by 3% YoY, fall in net profits is relatively steeper at 14% YoY on account of a rise in interest costs.


Standalone financial snapshot
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Net sales 9,294 8,641 -7.0% 18,442 16,902 -8.4%
Expenditure 8,468 7,836 -7.5% 16,709 15,377 -8.0%
Operating profit (EBDITA) 826 805 -2.6% 1,733 1,525 -12.0%
EBDITA margin (%) 8.9% 9.3%   9.4% 9.0%  
Other income 119 121 1.3% 152 132 -12.9%
Interest expense/(income) 252 310 23.2% 448 614 37.0%
Depreciation/ Amortisation 193 203 5.1% 382 395 3.5%
Profit before tax 500 412 -17.6% 1,055 648 -38.6%
Tax 129 93 -27.9% 299 165 -44.7%
Profit after tax/(loss) 372 320 -14.1% 756 483 -36.2%
Net profit margin (%) 4.0% 3.7%   4.1% 2.9%  
No. of shares (m)       475.1 475.1  
Diluted earnings per share (Rs)*         á1.6  
(* on trailing twelve months earnings)

What has driven performance in 2QFY14?
  • Tube's revenues fell by 7% 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 14% YoY largely due to the 15% YoY drop in volumes. The Engineering division recorded a mere 2% YoY growth in revenues. In this, volumes of tubes grew by 1% YoY, while those of cold rolled steel strips grew by 5% 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 1% YoY. While the doorframes and railway segments did poorly, domestic volumes of automotive chains increased by 19% YoY and volumes to the replacement market grew by a robust 36% YoY.

    Standalone cost break-upů
    (Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
    Raw materials 5,792 5,202 -10.2% 11,463 10,213 -10.9%
    % sales 62.3% 60.2%   62.2% 60.4%  
    Staff cost 718 775 7.9% 1,391 1,519 9.2%
    % sales 7.7% 9.0%   7.5% 9.0%  
    Other expenditure 1,958 1,858 -5.1% 3,855 3,645 -5.5%
    % sales 21.1% 21.5%   20.9% 21.6%  
    Total expenses 8,468 7,836 -7.5% 16,709 15,377 -8.0%

  • Tube's operating profits fell 3% YoY during the quarter better than the 7% YoY decline in sales, as operating margins improved by 0.4% YoY to 9.3%. 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 under pressure due to increase in input costs and a competitive environment. However, those for the engineering division improved led by better internal efficiencies and cost reduction.

  • While operating profits fell by 3% YoY, fall in net profits was relatively steeper at 14% YoY on account of a rise in interest costs. 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 165, the stock trades at a multiple of 17.6 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. 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. Overall, our view is that investors Hold on to the stock.

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