Tube Invest.: Hit by margin pressure - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Tube Invest.: Hit by margin pressure

Dec 7, 2012

Tube Investments of India (TII) announced the second quarter results of financial year 2012-2013 (2QFY13). The company reported a 9% YoY growth in revenues, while profits fell by 18% YoY. Here is our analysis of the results.

Performance summary
  • Revenues grow by 9% YoY during 2QFY13 largely led by the growth in the bicycles division.
  • Operating margins fall by 1.1% YoY to 8.9% during 2QFY13 on the back of higher raw material 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 declines by 18% YoY.

Standalone financial snapshot
(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Net sales 8,519 9,294 9.1% 17,262 18,442 6.8%
Expenditure 7,666 8,468 10.5% 15,365 16,709 8.7%
Operating profit (EBDITA) 854 826 -3.2% 1,897 1,733 -8.6%
EBDITA margin (%) 10.0% 8.9%   11.0% 9.4%  
Other income 130 119 -8.5% 143 152 6.2%
Interest expense/(income) 197 252 27.7% 369 448 21.6%
Depreciation/ Amortisation 182 193 6.2% 365 382 4.6%
Profit before tax 605 500 -17.3% 1,306 1,055 -19.2%
Tax 153 129 -16.2% 354 299 -15.6%
Profit after tax/(loss) 451 372 -17.6% 952 756 -20.5%
Net profit margin (%)       5.5% 4.1%  
No. of shares (m)       475.1 475.1  
Diluted earnings per share (Rs)*         3.4  
Price to earnings ratio (x)*         50.6  
*On trailing 12 months earnings

What has driven performance in 2QFY13?
  • Tube's revenues grew by 9% YoY during the quarter which was tepid given the subdued conditions in the auto and industrial sectors. In terms of business segments, the bicycle division's revenues grew by 18% YoY largely due to the servicing of institutional orders. The Engineering division recorded a growth of 7% YoY. The demand for tubes and cold rolled steel strips was impacted on account of declining 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 1% 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 release of further orders as well as severe price pressure on account of competition.

    Standalone cost break-up...
    (Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
    Raw materials 5,248 5,792 10.4% 10,711 11,463 7.0%
    % sales 61.6% 62.3%   62.0% 62.2%  
    Staff cost 664 718 8.2% 1,281 1,391 8.6%
    % sales 7.8% 7.7%   7.4% 7.5%  
    Other expenditure 1,754 1,958 11.7% 3,373 3,855 14.3%
    % sales 20.6% 21.1%   19.5% 20.9%  
    Total expenses 7,666 8,468 10.5% 15,365 16,709 8.7%

  • Tube's operating profits fell by 3% YoY during the quarter, as operating margins shrunk by 1.1% YoY to 8.9%. This was on the back of higher raw material costs and other expenditure (as a percentage of sales). Raw material costs stood at 62.3% of the company's revenues for 2QFY13 as compared to 61.6% in 2QFY12. Overall, margins were under pressure across all segments due to increase in power & fuel costs, inflation as well as lower volumes.

  • Poor performance at the operating level coupled with higher interest costs led to the 18% YoY drop in net profits.

What to expect?
At the current price of Rs 171, the stock trades at a multiple of 11.9 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. 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, the consolidated results for the current quarter reflected 27 days of performance. A new board, CEO and Executive Director has been appointed for this company and the process of integration is still going on. Given that the synergies from this deal will take some time to materialize, we have not yet taken this acquisition into account for our estimates. Overall, the stock price has appreciated 25% since our recommendation and we recommend that investors 'Hold' on to the stock.

To Read the Full Story, Subscribe or Sign In
To Read the Full Story, Subscribe or Sign In

India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms


Jun 11, 2021 (Close)


  • Track your investment in CHOLAMANDALAM FINANCIAL HOLDINGS with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks