Tube Investments of India Ltd

(TII)
BUY

Analyst
Nilesh Gandhi
nilesh.gandhi@destimoney.com

31 December 2014

BUY
TARGET : `430
CMP : ` 355

TII- BUY, with a target upside of 21%

Key Data

` mn Standalone)
(`

Risk Category

MEDIUM

NSE Code

TUBEINVEST

BSE Code

504973

FY14

FY15E

FY16E

35,655

35,256

42,286

47,933

EBITDA

3,005

3,025

3,703

4,463

EBITDA Margin

8.4%

8.6%

8.8%

9.3%

Net Revenue

Sector

Auto Ancilliary

EPS (`)

5.6

5.0

6.4

8.9

Industry

Auto Ancilliary

P/E (x)

63.7

70.5

55.4

40.0

1.8

1.9

1.5

1.4

21.7

21.6

17.6

14.6

Price Performance

CY11

CY12

CY13

YTD

Absolute

-29%

85%

-21%

126%

Relative

-4%

57%

-28%

95%

Face value (` per share)

Book value (` per share)

104

Dividend yield

0.6%

52 Wk.(H/L)(`)

378/151.8

Market Cap. (` mn)

66,386

Shareholding Pattern
Jun-14

Mar-14

Dec-13

Promoters

48.2%

48.2%

48.2%

48.3%

FII

14.0%

16.4%

16.4%

16.3%

DII

12.1%

10.1%

9.5%

9.4%

7.2%

7.1%

7.2%

6.2%

18.5%

18.2%

18.7%

19.9%

100.0%

100.0%

100.0%

100.0%

Others
Total

Source: Company, Destimoney Research, NSE

EV/Sales
EV/EBITDA

Relative stock performance (Dec13=100)

Sep-14

Bodies Corporate

FY13

250
200
150
100
50
Dec-13

Mar-14

Apr-14

Jun-14

TUBEINVEST

Aug-14
NIFTY

Oct-14

Dec-14

TII: Economic recovery and new product launches to improve earnings of

core operations

Tube Investments of India Limited (TII) is a flagship company of Murugappa Group, operating in
different businesses such as cycles, welded tubes, automotive and industrial chains, metal door frames
for passenger cars & railways and fine blank components.

TII also holds 60.56% stake in Cholamandalam Investment and Finance Company (CIFC). In 2003, the
company jointly ventured into insurance business with Mitsui Sumitomo Insurance, Japan and currently
holds 74% stake in the company. In 2012, TII acquired 44.12% stake in Shanthi Gears from its
promoters and entered into non-automotive gear business.

The companys core business performance suffered in last two years due to slowdown in auto sector.
With recovery in passenger cars and two wheeler sector, engineering and metal formed products (MFP)
divisions have started showing signs of improvement.

Cycle division of the company is planning to launch the first ever domestic brand of fully carbon road
bike next year. After a gap of nearly 20 years, TI Cycles has started manufacturing bicycles for exports
from a dedicated assembly line with an annual capacity of about 1 lakh cycles. This is expected to boost
the profitability of Cycle division which forms 31% of core manufacturing business.

Recently the company started production of large diameter tubes used for hydraulic
cylinders, earthmoving and construction equipment, propeller shafts for high payload vehicles and rear
axle tubes for UVs at newly built Chennai facility. This would enable the company to make tubes up to
7.5 inches diameter as against 4.5 inches at present.

In case of MFP division, fine blank components business is doing well. The company has been working
with leading auto OEMs to work out import substitute solutions in this area. It has received initial orders
from Maruti Suzuki.

 coupled with high operating leverage benefits coming from investee

companies

The investee companies operations have been restructured post acquisitions. F C10s Sedis is a popular
name in industrial drive chains market globally. The company is utilizing the technological advantage of
this French subsidiary in its Indian operations.

Shanthi Gears has started getting back the lost customers post management change. The order book
has grown from `640 mn at the end of Mar14 quarter to `740 mn in Jun14 quarter and it stood at
`890 mn at the end of Sep14 quarter. We expect capacity utilisation to increase substantially, leading
to margin recovery in coming quarters.

NBFC subsidiary company i.e. CIFC which mainly finances small to mid range of LCV and HCV fleet
operators, has expanded its base from 236 branches in FY11 to 570 branches at the end of Q2FY15.
Impending recovery in CV sales should result in high operating leverage for this business.

The insurance business has witnessed substantial improvement in profitability as it had no provision for
motor pool losses in current year as compared to previous year. The size of the investment book stood
at `30bn at the end of Q2FY15 and the company has reported underwriting profit in this quarter. The
management is eyeing opportunities to monetize the insurance business.

Post union election, business environment in the country has improved. Government has been
emphasizing on Make in India initiative. TIIs recent investments are in line with this initiative. TII is
expected to be one of the key beneficiaries of economic revival. This would result in overall
improvement capacity utilisation leading to recovery in margin and return ratios of TII in coming years.

We recommend BUY rating on Tube Investments of India Limited with a target price of `430 per
share.

TII is mainly an auto component player with investment in industrial and

financial services business
Revenue
Tube Investments
of Mix
India Limited
`37.4 bn

Core Operations

`11.8 bn

`14.8 bn

Cycles, Components
& E-Scooters

Cycles


Standard

Special

E-Scooters

Fitness
Equipment

Plant Location
 Ambattur, Chennai
 Nashik
 Noida

Precision Tubes

 Cold Drawn Welded

(CDW)

Metal Formed
Products (MFP)

Door Frames of
Vehicles

Cold Rolled
Formed sections
for wagon

Automotive &
Industrial
Chains

 Electric Resistance
Welded (ERW)

Cold Rolled
Steel Strips

Plant Location
 Mohali
 Avadi, Chennai
 Shirwal, Satara

Manufacturing

Financial Services

`0.1 bn

`1.5 bn

FC 10
100%

Standard Gear
box

Plant Location

Customized
Gearbox

 France

`32.8 bn

Asset Financing
 Vehicle Finance
 Business Finance
 Home Equity

Plant Location
 Coimbatore
 Tirupur

Joint Ventures:

Cholamandalam MS Risk Services Limited (49.5:50.5 )

TI Tsubamex Private Limited (50:50)

Source: Company

1 CIFC stands for Cholamandalam Investments and Finance Company

2 CGIC stands for Cholamandalam General Insurance Company

`16.4 bn

CIFC1
50.45%

Shanthi Gears
70.12%

Industrial
Chains

Plant Location

`49.2 bn

`1.6 bn

Fine blank
Components

 Bawal, Hariyana
 Tiruninravur
 Uttrarakhand
 Baroda
 Chennai
 Kazipally, Medak
 Halol
 Pune
 Sanand

`50.9 bn

Subsidiaries

`10.7 bn

Engineering

FY14 Rev = `88.3 bn

CGIC2
74%

Non Life
Insurance

Core operations of the company have started to show improvement as

passenger cars and two wheelers sales are recovering

Passenger Cars (LHS)

Commercial Vehicles (LHS)

Three Wheelers (LHS)

Millions

Q2FY15

Q1FY15

Q4FY14

Q3FY14

Q2FY14

Q1FY14

Q4FY13

Q3FY13

Q2FY13

Q1FY13

Q4FY12

Q3FY12

0.0
Q2FY12

0
Q1FY12

1.4

Q4FY11

250

Q3FY11

2.8

Q2FY11

500

Q1FY11

4.2

Q4FY10

750

Q3FY10

5.6

Q2FY10

1,000

Q1FY10

Thousands

Auto Sector: Quarterly Production Trend

Two Wheelers (RHS)

` mn

TIIs Core Operations Quarterly Performance Trend

11,000

44.0%

8,250

33.0%

5,500

22.0%

2,750

11.0%

Revenue (LHS)
Source: Company, ACE Equity

Gross Margin (RHS)

Operating Margin (RHS)

Q2FY15

Q1FY15

Q4FY14

Q3FY14

Q2FY14

Q1FY14

Q4FY13

Q3FY13

Q2FY13

Q1FY13

Q4FY12

Q3FY12

Q2FY12

0.0%
Q1FY12

Net Margin (RHS)

Recent performance has witnessed improvement in topline, however bottom

line remained under pressure
Quarterly and Half-yearly Performance
(Standalone) ` mn

Q2FY15

Q2FY14

% Change

H1FY15

H1FY14

% Change

10,056

8,641

16.4%

19,826

16,902

17.3%

6,250

5,202

20.1%

12,402

10,213

21.4%

836

775

7.8%

1,630

1,519

7.3%

2,117

1,858

13.9%

4,145

3,645

13.7%

Operating Profit

854

805

6.1%

1,649

1,525

8.1%

Interest & Fin. Charges

353

310

684

614

Depreciation

229

203

441

395

Other Income

90

121

105

132

PBT

361

412

-12.4%

628

648

-3.0%

Tax

108

93

16.7%

186

165

12.3%

PAT

253

320

-20.9%

443

483

-8.3%

EPS (` per share)

1.4

1.7

-20.9%

2.4

2.6

-8.3%

37.8%

39.8%

37.4%

39.6%

Operating Margin

8.5%

9.3%

8.3%

9.0%

Net Margin

2.5%

3.7%

2.2%

2.9%

Total Income
COGS
Employee Exp
Other Exp

Gross Margin

Source: Company, Destimoney Research

As the companys two-third of business comes from B-2-B segment, margin recovery comes with a lag.

With a launch first ever domestic brand of fully carbon road bike next
year, business margin should revive
Bicycle Industry Volume Share
Atlas
16%

TII
32%

Avon
14%

Hero
38%

Cycles / Components / Scooters Performance

13,600

8%

10,200

6%

6,800

4%

3,400

2%

0
FY11
FY12
Revenue (Rs Mn- LHS)

FY13

0%
FY14
H1FY15
Cycles Sold('000s- LHS)

EBIT Margin (RHS)

Source: Company, Destimoney Research

Standard cycle segment which forms 40% of total industry size continues to de-grow, while the premium or
special segment is growing in 8-25% range in Kids, Adult and high end sub-segments.

TII is the second largest player in the industry with 940 retail stores and more than 10,000 touch points in the
country.

The company has developed 40 products in H1FY15 and it is planning the first ever domestic brand of fully
carbon road bike next year. After a gap of nearly 20 years, TI Cycles has started manufacturing bicycles for
exports from a dedicated assembly line with an annual capacity of about 1 lakh cycles. This is expected to boost
the profitability of Cycle division which forms 31% of core manufacturing business.

Commencement of large diameter tube production facility would de-risk

the dependency on auto sector and would be margin accretive
Engineering Business Performance

Tubes: Business Mix

` mn

Non-Auto
22%

Auto
78%

16,000

12%

12,000

9%

8,000

6%

4,000

3%

0%
FY11
FY12
Revenue

FY13

FY14
H1FY15
EBIT Margin

Source: Company, Destimoney Research

Engineering division has been mainly catering to Auto OEMs for their requirements of tubes. It is market leader
in high Quality & safety critical CDW Tubes for two wheeler and four wheeler applications. Recently the
company started production of large diameter tubes used for hydraulic cylinders, earthmoving and construction
equipment, propeller shafts for high payload vehicles and rear axle tubes for UVs at newly built Chennai facility.
This would enable the company to make tubes up to 7.5 inches diameter as against 4.5 inches at present.

The company has invested `2.5bn in the new facility. Tubes produced in this facility would act as import
substitute which form around 30% of the total requirement in the country. In next three years the company
expects this plants turnover to reach at `4.5bn.

MFP division suffered due to weakness in passenger cars demand; fine

blank component business is gaining traction
Engineering Business Performance

MFP: Business Mix

Railways
4%

` mn

Non-Auto
20%

Auto
76%

10,000

16%

7,500

12%

5,000

8%

2,500

4%

0%
FY11
FY12
Revenue

FY13

FY14
H1FY15
EBIT Margin

Source: Company, Destimoney Research

10

Metal Formed Products (MFP) division mainly caters two wheelers with its Diamond branded chains and door
frames to passenger cars. The Chains business reported volume growth of 23.3% at 429.1 lac ESS feet in
H1FY15. In recent past, the door frame business has been under pressure as the specific passenger car models
to which the company was supplying door frames were not performing well. The door frame volume dropped
11.6% in H1FY15 to 0.37 mn sets. The company has restricted further investment in door frame and railway
business.

The fine blank components business is doing well. The company has been working with leading auto OEMs in
the country to work out import substitute solutions in this area. It has received initial orders from Maruti
Suzuki.

French subsidiary FC10, is adding to the strength of industrial chains

division; synergy benefits eyed
FC10: Business Mix

FC10 Business Performance

2,600

Rest of the
world
33%

6%

1,950
` mn

4%

France, Italy
67%

1,300
2%
650
0

0%
CY10
CY11
Revenue (LHS)

CY12

CY13 H1CY14
PBIT Margin (RHS)

Source: Company, Destimoney Research

11

F C 10 with its Sedis brand is a leader in special engineering class chains and holds five global patents. It caters
to wide range of industries like waste treatment, automobile, escalator, textiles, food processing and
packaging, cement , sugar ,paper, water treatment , lumber , dams , amusement park and oil platforms.

It is present in 100 countries with 200 distributors and over 400 touch points.

The company is utilizing the technological advantage of this French subsidiary in its Indian operations.

Shanthi Gears order book has been growing consistently on QOQ basis
and it could be promising high operating leverage play
Shareholding Pattern

FII

Sep-14

Jun-14

Mar-14

Dec-14

1,800

70.1%

70.1%

70.1%

70.1%

1,350

1.8%

1.9%

1.9%

1.9%

` mn

Tube Investments

Shanthi Gears Business Performance

18%

3.5%

2.6%

2.4%

2.7%

Bodies Corporate

1.6%

2.2%

2.1%

1.6%

450

23.0%

23.3%

23.6%

23.7%

Total

100.0%

100.0%

100.0%

100.0%

24%

900

DII

Others

30%

12%
6%
0%
FY11
FY12
Revenue (LHS)

FY13

FY14
H1FY15
PBIT Margin (RHS)

Source: Company, Destimoney Research

12

Shanthi Gears operates mainly into customised gears and gearboxes solutions business. This is a high margin
business that caters to diverse industries like cement, sugar, mining, railways, textiles and general engineering.

Prior to its acquisition by TII, the company lost its key customers due to internal operational issues. After
acquisition by TII, a professional management was brought on to the board and the company started regaining
orders from erstwhile customers.

The order book has grown from `640 mn at the end of Mar14 quarter to `740 mn in Jun14 quarter and it
stood at `890 mn at the end of Sep14 quarter. We expect capacity utilisation to increase substantially, leading
to margin recovery in coming quarters.

We expect recovery in CV sales to drive CIFCs growth with improved

return ratios due to rapid branch expansion carried out in last three years
Assets under management
Home
Equity
27%
 Loans against
residential property to
self employed
individuals

Others
2%  Business Finance
Funding, MSME, Gold
loans and home loans

Vehicle
Finance
71%

Note: Managed assets refers to Own assets + off balance

sheet items which have been securitized/sold on a
bilateral assignment basis.

 Vehicle financing for

new and used
HCVs, LCVs, SCVs, ML
CVs, MUVs, Tractors
and Cars

CIFC Performance Summary

FY11

FY12

FY13

FY14

H1FY15

Branches

236

375

518

574

579

Disbursements (` bn)

57.3

88.9

121.2

131.1

62.2

AUM (` bn)

91.2

134.7

190.0

232.5

140.5

Net Income Margin

8.8%

7.4%

7.6%

7.4%

7.6%

Losses and Provisions

2.8%

0.4%

0.8%

1.5%

1.6%

Expense Ratio

4.6%

4.1%

3.8%

3.4%

3.4%

Return on Total Assets

1.4%

2.7%

3.0%

2.8%

2.7%

Return on Equity

6.7%

13.8%

18.1%

17.1%

15.3%

Source: Company, Destimoney Research

13

Started in 1978, Cholamandalam Investment & Finance (CIFC) operates in vehicle financing, home equity
businesses. It has 579 branches across 23 states / union territories with 71% of its branches in rural part of the
country.

CIFC mainly caters to small fleet operators in vehicle financing and to non-salaried professionals in home equity
business. With improved business sentiments in the country, the credit demand is likely to recover in coming
quarters. Rapid expansion carried out last three years should result in high operating leverage leading to
improved return ratios.

Incremental home equity business would continue to normalize cyclical risk in CV industry.

Insurance business has been growing steadily with improved profits

mainly due falling contribution to motor pool losses
CGIC Performance Summary
` bn)
(`

FY11

FY12

FY13

FY14

H1FY15

10.5

13.5

16.5

18.7

9.8

7.3

8.3

13.5

15.5

7.6

PBT

(0.2)

0.2

0.9

1.0

1.0

PAT

(0.2)

0.2

0.6

0.7

0.7

9.7

12.6

17.2

23.3

30.1

114.0%

110.0%

99.5%

101.3%

102.2%

8.5%

9.0%

9.3%

9.4%

Gross Written Premium

Net Written Premium

Total Investment
Combined ratio (CoR%)
Investment Yield %

Source: Company, Destimoney Research

Chola MS General Insurance i.e. CGIC has products related to accident, engineering, health, liability, marine,
motor, property, travel and rural insurance for individuals, SMEs and corporates

14

Business holds a market share of 2.5% as on Sep 30th, 2014 and is the 7th largest private general insurance
company in India

Combined ratio for Q2FY15 stood at 99.7% which means the company has made profit in underwriting.

The company is awaiting Governments stance on foreign direct investment in insurance sector and is likely to
monetise in case the policies are favorable.

TIIs investment in manufacturing products that can act as import substitute, is

likely to result good business opportunity in the next three to four years
Financial Estimates: Core Business
` mn

FY14

FY15E

FY16E

FY17E

CAGR

11,850
14,863

13,882
17,420

15,742
21,904

17,851
28,347

14.6%
24.0%

8,509

9,185

10,287

11,418

10.3%

35,222

40,486

47,933

57,616

17.8%

EBIT Margin
Cycles / Components / Scooters
Engineering

3.2%
9.2%

3.5%
9.9%

3.6%
10.1%

3.8%
10.2%

Metal Formed Products

7.7%

6.7%

6.8%

6.8%

Total

6.8%

7.0%

7.3%

7.5%

Segment Revenue
Cycles / Components / Scooters
Engineering
Metal Formed Products
Total

Source: Company, Destimoney Research

15

Tube investment has been eyeing opportunities in manufacturing products where current demand is met by
imports. It has formed 50:50 JV with Tsubamex, Japan for manufacturing dies that are used by auto OEMs. It
has also started large diameter tube plant which would cater to various industries in India and is likely to start
exports in next 3-4 months.

We believe that capacity utilisation of the companys different divisions to go up with revival in auto sector.
Also, the companys efforts to move into industrial products business to reduce its dependency on auto sector
gradually.

Cycle business should witness margin recovery post new premium segment product launches.

We expect core operations to grow at a CAGR 17.8% in next three years with improving margin profile.

and higher operating leverage to improve the efficiency and health of

balance sheet
Asset Turnover

Return on Asset
28%

4.8

21%

3.6

14%

2.4

7%

1.2

0%

0.0
FY12

FY13

FY14

Cycles / Components / Scooters

FY15E

FY16E

FY17E

FY12

Engineering

FY13

FY14

Cycles / Components / Scooters

Metal Formed Products

FY15E

FY16E

FY17E

Engineering

Metal Formed Products

Total Debt / Equity Ratio

1.6
1.2
0.8
0.4
0.0
FY12

FY13

Source: Company, Destimoney Research

16

FY14

FY15E

FY16E

FY17E

We believe that capacity utilisation of the

companys different division to go up with revival in
auto sector.

We use sum of the parts methodology to value Tube Investments of India

Sum of the parts valuation summary
Business

Valuation Parameters

Core Operations

Value per share

11.5 times FY17 EBIDTA of `5.4 bn

255

Investment in CIFC

30% discount to market capitalisation of `67.9 bn

129

Investment in Shanthi Gears

30% discount to market capitalisation of `10.8 bn

28

Investment in insurance business

17

Insurance Business
Target Price

430

Auto Ancillary Peers Consensus Estimate

Company

FY17E EV/EBIDTA Multiple

Amara Raja Batteries Ltd

12.9

Bharat Forge Ltd

11.5

Bosch Ltd

18.1

Exide Industries Ltd

11.3

Motherson Sumi Systems Ltd

8.0

Sundram Fasteners Ltd

7.6

Wabco India Ltd

18.2

Median

11.5

Source: Company, Bloomberg, Destimoney Research

17

To value core operations of the company we have

used median FY17 EV/EBIDTA multiple of its auto
ancillary peers

Insurance business has written off almost all the

losses in motor pool and the company has started
reporting profit. The company is looking for
monetisation opportunities of this business.
Separate listing of insurance business may provide
further upside to the investors in this company.

Valuation and recommendation

With multiple triggers in all the three core

businesses and improved outlook in investee
companies, we remain positive on TIIIs
sustainable earnings recovery in next three
years.
We recommend BUY rating on Tube
Investments of India Limited with a revised
target price of `430 per share.

Relative stock performance (Dec13=100)

250
200
150
100
50
Dec-13

Mar-14

Apr-14

Jun-14

TUBEINVEST

Parameters (Standalone)
EPS (` per share)
P/E (x)
ROE
ROCE
EV/Sales
EV/EBIDTA

Oct-14

Dec-14

NIFTY

FY13

FY14

FY15E

FY16E

5.6

5.0

6.4

8.9

65.2

72.1

56.6

40.9

8.8%

7.6%

9.2%

11.7%

12.5%

11.7%

13.2%

15.3%

1.8

1.9

1.5

1.4

21.7

21.6

17.6

14.6

Source: Company, Bloomberg, Destimoney Research

18

Aug-14

Standalone Financials
Income Statement
` mn

FY13

FY14

FY15E

FY16E

` mn

FY13

FY14

FY15E

FY16E

35,655

35,256

42,286

47,933

Liabilities

Total Expenditure

7,719

7,720

7,721

7,722

Share Capital

373

374

374

374

EBIDTA

3,005

3,025

3,703

4,463

Reserves & Surplus

11,440

12,015

12,723

13,785

Interest & Fin. Charges

1,067

1,252

1,364

1,364

Shareholders Equity

11,813

12,388

13,097

14,159

Depreciation

798

842

940

1,055

Deferred Tax Liability

523

520

520

520

Other Income

370

481

400

450

Other LT Liabilities

6,304

6,380

6,380

6,380

Exceptional Items

(38)

ST Borrowings

3,032

3,029

3,029

3,029

PBT

1,472

1,412

1,800

2,494

Other Current Liabilities

9,708

11,432

12,988

13,924

Tax

433

472

601

833

31,379

33,750

36,015

38,012

PAT

1,040

941

1,199

1,662

5.6

5.0

6.4

8.9

Net Block

6,316

6,943

8,301

9,945

CWIP

1,597

1,971

1,500

1,000

787

650

650

650

14,440

15,057

15,057

15,057

Total Income

EPS (` per share)

Total Liabilities
Assets

Ratios

FY13

FY14

FY15E

FY16E

LT Loans and Adv

Revenue Growth (%)

2.2%

-1.1%

19.9%

13.4%

Investments

Operating Margin (%)

8.4%

8.6%

8.8%

9.3%

Current Assets

8,239

9,130

10,507

11,361

Net Margin (%)

2.9%

2.7%

2.8%

3.5%

Total Assets

31,379

33,750

36,015

38,012

Source: Company, Destimoney Research

19

Balance Sheet

Key risks

20

TIIs business is highly dependent on auto industry and any delay in recover in the sector would
negatively on TIIs growth prospects

Steel is a major raw material and any adverse movement in the steel prices could negatively impact the
companys margins.

Destimoney Securities Private Limited

6th Floor, "A" Wing, Tech-Web Centre, New Link Road, Oshiwara, Near Behram Baug, Jogeshwari (West), Mumbai -400102

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