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May 6, 2015

edelweiss- Tube Investment Ltd Q4FY15 Result Update : Profitability aided by improved mix & cost control (HOLD, CMP: INR 361)

Tube Investment Ltd.’s (TI) reported Q4FY15 standalone adjusted PAT which was largely in-line with estimates. The company reported exceptional items of ~INR 16 cr which is incurred for the implementation of voluntarily retirement of scheme (VRS) and INR 61 cr which is largely attributable to profit on sale of non-operating real estate assets by the company. The company reported lower than expected standalone sales growth of 2% YoY, as a result of a 5% YoY sales decline in the Engineering Division. EBITDA margins for the quarter stood at 9.1% Vs our estimate of 8.7% led by significant margin improvement in the Metal Forming (+260 bps QoQ) and Engineering Divisions (+150 bps QoQ). Chola Investment & Finance Ltd., a subsidiary of TI, registered Q4FY15 PAT of INR 136 cr, up 47% YoY. We expect margin to improve going forward due to VRS benefits, improved mix of large diameter tube and operating leverage.  We have HOLD rating on the stock.
Sales growth at 2% YoY; Aftermarket & export focus to help tide over subdued OEM industry growth
Overall sales in Q4FY15 grew by 2% YoY, on the back of a 5% decline in sales for the Engineering segment. The cycle division sales (7% YoY) was spurred by execution of a institutional orders from the Tamil Nadu & Karnataka while the Metal forming division sales (8% YoY) was driven by increased after market penetration (especially through the OES route) and export sales improvement. Going forward, the company is focusing on increasing its presence in high value added products like large diameter tubes, Industrial chains & fine blanking products which could provide for import substitution. Additionally, TI plans on increasing its presence in the aftermarket & export segment to tide over the slow-down in 2-Wheeler OEM growth.
EBTDA margin improvement through favorable product mix and cost control
Standalone EBITDA margins rose by 150 bps QoQ to 9.1% for the quarter, majorly on the back of gross margin improvement of 100 bps QoQ. Additionally, employee cost & other expenses as a percentage of sales also fell by 20 bps QoQ each. The engineering segment margins rose by 150 bps QoQ despite low utilization of the large diameter tube capacity (high margin business) due to cost control initiatives by the management. TI reported exceptional items of ~INR 16 cr which represents the implementation of voluntarily retirement of scheme (VRS) for the engineering division. The company’s ramp-up of its large diameter tube facility utilization was marginally delayed but is now on track to reach 50% utilization in the next 8-9 months. Metal Forming division reported a 260 bps QoQ margin jump on the back of favorable product mix in the chain segment as well as improvement in terms of aftermarket & export sales which have a better margin profile than the OEM segment. We expect margin to improve going forward due to VRS benefits, improved mix of large diameter tube and operating leverage.
Insurance subsidiaries reports positive results; Capacity utilization of Shanthi Gears set to improve
Chola Investment and Finance PAT increased to INR 136 cr, a growth of 47% YoY. Disbursement growth remained muted with 4% de-growth YoY. The asset quality remained steady, with Gross NPA increasing from 2.7% in Q4FY15 versus 3.1% in the previous quarter. Additionally, Net NPA came off to 1.51% in Q4FY15 from 1.71% in Q3FY15 and going forward asset quality is expected to improve. Shanthi Gears’ sales for the quarter were up by 3% YoY while Q4FY15 PAT came in at INR 1.4 cr. The execution of lower margin orders from the last two quarters has affected the profitability of the company. The management expects the mix of lower margin orders to reduce going forward.
We expect TI’s sales and PAT to grow by 15%/53% CAGR over FY15-17E, respectively led by capacity expansion, foray into new products, revival in end user demand and margin expansion. Subsidiaries value (after 30% discount) is 60% of the current TI’s market capitalization. After removing contribution from financial subsidiaries, the stock currently trades at core P/E of 22.7x FY16E EPS

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