Tube Investments: Buy

Worries over slowing automobile growth have sent the stock of Tube Investments of India (Tube Investments) down by 21 per cent in six months. Long-term investors can take the opportunity to buy into this diversified auto-ancillaries and bicycle retailer at an attractive valuation of 9.5 times the consolidated trailing 12-month earnings. The gowth prospects appear bright, given the company's expansion plans. Tube Investments also holds a 60 per cent stake in Cholamandalam Finance, which has a market value of Rs 1,000 crore. Tube Investments enjoys a market cap of just Rs 2,300 crore.

GROWING MARKET SHARE

Tube Investments makes bicycles, tubes, chains and rolled steel components, a major portion of which is consumed by the automotive sector. The company has consistently grown its volumes and holds market share of 20-60 per cent across its divisions.Between 2005 and 06 and 2010-11, sales and net profits in Tube Investments' core business grew at a compounded pace of 14.5 and 21.3 per cent to Rs 2,966 and Rs 133 crore respectively. Realisations and volumes across the product line also grew robustly.

WELL-HEDGED PRODUCT MIX

This diverse product mix is a good hedge in a weak market. Tube Investments caters to two wheelers, passenger cars and commercial vehicles. This gives the leeway for underperformance in one to be compensated for by a decent showing by another. Case in point; the quarter ended December 2011. A weak railway-wagon and passenger car market had hurt sales as well as profit growth as both are high-margin businesses. Higher spending on imports and expansion hurt too.

However, good performances from tubes and automotive chains helped limit profit decline to 15 per cent. This was a solid showing in a quarter when several tube producers found themselves unable to fully pass through costs. Higher realisations across product segments and growth in the bicycle segment had lifted sales in this business by 17 per cent too. Several of the items which impacted quarterly profits were one-off in nature. Revival in the car market may not be as swift. Industry estimates suggest that passenger car growth may moderate to low single-digits this fiscal.

LONG-TERM PROSPECTS

However, in the longer run, an under-penetrated automobile market does provide scope for higher sales. Tube Investments hopes to capitalise on this through a near-fifty per cent increase in tube making capacity. This includes a new plant in North India for the existing customers. In the metal forming space, the company has slack capacity to cater to growing two-wheeler replacement-chain markets and wagon-makers.Margins have cooled in the bicycle segment due to a weak rupee and limited pricing power. However, presence in the fitness space (growing at a run rate of 30 per cent) and improving realisations on domestic bikes could deliver growth with better margins.

Similarly, easing interest rates and large domestic steel capacity additions are expected to help TI's cause. Interest coverage ratio of over 5 times during the first nine months of FY12 implies the company has scope to borrow more (as of now, the standalone debt:equity is 0.8).

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