Recommendation from engineering company

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year 

TUBE INVESTMENT OF INDIA: ON THE EXPANSION PATH

HERE IS WHY
✓Exploring potential in TMT bars segment
✓Healthy cash flows
✓Better capital allocation

Tube Investment of India limited (TIIL) is a flagship company of the Murugappa Group. TIIL produces a vast variety of items for major industries and sectors including the automotive, railroad, construction, mining and agriculture, among others. The three primary business segments of the company are bicycles, metal-formed products and engineering. The company is looking at the potential offered by TMT bars, truck body buildin, and the business of automotive vision and other vision systems as part of its expansion strategies.

In FY22, the mobility segment contributed 10 per cent of the company’s total revenue. Under the brands BSA, Hercules, Montra and Roadeo, the company manufactures conventional and specialty bikes for this niche market. It also sells some international brands like Bianchi. TIIL is anticipated to launch its three-wheeler electric vehicle in the near future. The plant is anticipated to start operations in FY 2023. The company has announced plans to spend up to ₹1,000 crore to build at least four platforms to manufacture threewheelers

 The engineering segment accounted for 31 per cent of sales in FY22 while the metal formed products division contributed 13 per cent. The gear division accounted for 2 per cent contribution in revenue for FY22. TIIL is a key supplier to the automotive and industrial chains as well as a market leader in CDW tubes. Additionally, it holds one of the biggest market shares in the cycle industry. 

The business is expanding both organically and inorganically. Over the years the company has acquired more than 30 companies out of which 10 are listed. Some of its subsidiaries are Chola, Coramandel, EID Parry, Shanti Gears, CG Powers, Cellestial, IPL Electric and Moshine Electronics. The acquisition of CG Power has reduced TIIL’s overall exposure to the automotive industry while at the same time expanding the scale of operations.

For a period of three years ending FY22, the company’s top-line has increased at a CAGR of 29 per cent. FY22 revenue increased by double-digit growth to ₹12,525 crore from ₹6,083 crore the previous year. The most recent FY23 Q1 sales saw growth of 56 per cent on sequential basis at ₹3,799 crore, which led to a rise of 83 per cent QoQ in net profit at ₹247 crore. The firm has dramatically raised both its working capital efficiency and interest coverage ratio. The receivable days have decreased from 53 days to 44 days in the last one year.

The ROE and ROCE for FY22 were at 36.8 per cent and 29.8 per cent, respectively, which indicates better capital allocation and returns to investment both equity and otherwise. The corporation has a healthy cash position. The cash flow from operations of the company increased noticeably from ₹257 crore in FY21 to ₹877 crore in FY22.

In terms of valuation, the company’s current PE is 53.5x. Even with a higher PE, the trend of organic and inorganic growth in financials is expected raise the share price. Compared to the industry, the company offers greater long-term returns. Looking at operational efficiency, diversified business and good financials along with the not so exorbitant valuation we recommend to BUY.