Tube Investments: Recommendation Review

We had recommended Tube Investments (TIL) in Dalal Street Investment Journal Vol. 26, Issue No. 24 (dated Nov. 7-20, 2011), when the scrip was trading at Rs 140. The company’s capacity expansion plans, the expected improvement in margins due to falling raw material prices, the introduction of new products, better financial performance and a consistent dividend payment history were among the compelling factors behind our recommendation.

The company has recently announced its acquisition of Shanthi Gears, which manufactures a wide range of products including gears, gear boxes, geared motors and gear assemblies. It has been designing, manufacturing and supplying various kinds of gears and gearboxes to various industries. TIL signed a share purchase agreement to acquire a 44.1 per cent stake in Shanthi Gears, and subsequently, it will be making an open offer to acquire another 26 per cent in the company. The total cost of acquisition, including the open offer, is expected to be around Rs 464 crore. We feel that this is a good strategic move, as it will reduce the dependency of the company on the auto sector.

TIL’s financial performance has been good in the March 2012 quarter, where it posted a topline of Rs 884.37 crore and a bottomline of Rs 57.76 crore against Rs 787.85 crore and Rs 46.45 crore respectively for the March 2011 quarter. We feel that the company has already witnessed a decent appreciation, and hence, booking partial profits in the counter would be the right strategy.