Tube Invest.: Hit by margin pressure

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.