ValuePickr Forum

Tube Investments Ltd ~ Diversified Engineering Company

TI Cycles setup with BSA and Hercules Brands in the year 1949.

Manufacturing Businesses of company includes –

• Engineering Segment (Tubes, Value Added Cold Rolled Strips, & Tubular Components)
• Cycles and Accessories (Bicycles & Fitness Products)
• Metal Formed Products (Chains for Automobile sector & Industrial applications, Doorframe & Channels for Passenger Cars)
• Gears and Gears Products (Investment in Shanthi Gears Limited – Industrial Gears)
• Others (Investment in TI Tsubamex Private Limited – Designing & Manufacturing of Dies)
• 25 Manufacturing Locations and Suppliers to all major automotive OEM’s or Tier 2/3 Suppliers
• TI Absolute Concepts is formed as a 50:50 Joint Venture in the business line of Bicycle Theme based Restaurant and Retail

Annual Report Review FY2017

TUBE INVESTMENTS OF INDIA LTD. ANNUAL REPORT REVIEW FY2016-17

Does anyone know when TI Cycles will be listed in the stock market after the de-
merger of investments from manufacturing?

Any break up of sales from all the segments it operates in…there is no report where we can see segment wise performance…

It’s available on BSE - check investor presentation dated Nov 2017

I have done more detailed analysis of the financial figures. Please find the figures below:

Cycle Division

Cycle 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Revenue 449 467 482 466 511 577 725 953 1,121 1,293 1,260 1,185 1,314 1,485 1,359
EBIT 20 17 20 13 20 22 29 69 80 76 53 38 58 79 36

Assets 204 221 223 159 187 189 190 262 258 301 285 276 423 526 622
Liab 69 83 107 70 90 105 135 164 183 211 199 214 253 262 332
Capex 5 14 9 5 5 3 6 10 6 6 11 8 20 51 54
Depreciation 4 4 5 6 5 5 6 7 7 7 9 7 7 8 16

Engineering Division

Engg 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Revenue 601 639 714 726 779 816 864 825 1,195 1,456 1,582 1,622 1,724 1,629 2,077
EBIT 43 53 92 108 82 41 16 86 114 131 110 136 103 95 145

Assets 414 390 377 428 510 549 458 531 612 705 735 918 936 869 947
Liab 147 145 120 101 160 187 129 146 225 256 235 309 316 278 317
Capex 9 18 30 75 49 42 18 34 19 96 82 125 87 44 49
Depreciation 19 20 19 21 24 25 27 28 27 30 34 39 48 60 63

Metal Division

Metal 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Revenue 36 51 254 269 324 370 484 580 775 870 850 851 929 954 1,141
EBIT 10 16 40 47 55 55 51 80 102 112 80 65 79 86 92

Assets 40 47 172 217 265 347 421 462 595 639 610 623 630 575 619
Liab 5 9 44 52 61 77 81 134 170 148 122 145 153 161 187
Capex 2 6 10 47 48 77 63 50 60 59 49 33 26 26 45
Depreciation 3 3 10 13 15 19 24 30 33 37 34 35 39 40 39

			Tube Investments Ltd

Highlight of Q4 FY18 and FY18 results
Financial Performance

  • Q4 FY18
    o Revenue up by 2 % aided by good pick up in Auto sector
    o PBT grew by 18 % before exceptional items
  • FY18
    o Revenue up by 12 %
    o PBT grew by 8 %
    o Debt to equity stand at 0.6 over 0.7 in last year
    o Debt to EBITDA stand at 1.8 over 2.1 last year
    o Interest cost reduce by 22 % YOY
    Segment wise
  • Engineering
    o Highest ever sale achieved . In large Diameter tubes recorded growth of 70 % with a marginal growth in export
    o Revenue grew by 24 % over last year
    o PBIT grew by 20 % over last year and 83 % in Q4
  • Cycle
    o It was a Difficult year for the industry as well as company
    o Performance cycling grew by 29 %
    o Overall volumes were down , market condition were not favourable
    o Also rationalise operation so company had shutdown it project in Nashik . Impact of this was shown in financials of about 11 Cr in terms of people left the company and inventory . It is a one off
    o Revenue decline by 10 % over last year. Market decline by 10-12 %
    o Lot of effort are going on reduce fix cost
  • Metal formed Product
    o It was a good year for the company
    o Two wheeler Industry grew by 16 % , scooter at 20 % and passenger vehicle also grew well
    o Net Revenue up by 11 % for Q4 FY18
    o PBIT was up by 16 % in FY18 and 43 % in Q4FY18
    o Good volumes in auto sales in OE and after market segment also
  • Gears and Gear Product
    o Revenue were up by 29 % over last year and Industry
    o Door frames grew by 13 %
    o Coaches supply was good up by 42 % both in Q4 and FY18
    o See good growth going forward
  • 25.25 Cr shown in exceptional items is a investment in two joint venture .
    o One a TII absolute where company partnered to promote high end cycling and where food and Beverages are supply to increase foot fall . Some had invested access over there so company is going to write off the investment done
    o Second is a venture in automotive Dye where company had a good start , good turnover but company had spend lot of money initiating in design and development for training. So company will write down investment value of it as well. Company settle itself as good supplier and got some good orders now . It is little volatile that orders come in bunch and there is little working capital requirement
    Subsidiary
  • Shanti Gears
    o Revenue grew by 16 % compare to last year and 9 % in Q4
    o PBT grew by 16 % to 33 Cr from 29 Cr
    o Booking improved by 16 % YOY
  • Subsidiary in France
    o Revenue grew by 9 %
    o No impact of increase in tax rate expect GST earlier it was 7 % and now 12 % , Others are same as excise duty
    Key Highlights
  • Good outlook in Auto Sector
  • Additional CAPEX in two plants in Rajpara , trial is going on and will be commissioned very soon
  • In Bicycle work is going on cost reduction and market is not going to grow
  • Company has to focus on profitable segment and reduce cost in terms of profitability
  • In Metal formed company is looking for expansion

Q&A

  • Why capital employee come down by 96 Cr QOQ in engineering division ?
    o Company was having high institutional lending which had bought down
  • What were the volume for bicycle and realisation ?
    o In Q4 Volume was 6.28 lakh cycle over 10.3 lakh last year same quarter
    o In full year volume in bicycle was 37.6 lakh over 39.5 lakh last year
  • How much contribution given by performance bicycle in total sales ?
    o 5 % of total sales
  • How much volume was there in engineering ?
    o In tubes , In Q4 FY18 it was 2.2 lakh ton over 1.83 lakh ton last year same quarter
    o In strips , In Q4 FY18 it was 60,000 ton over 56000 ton last year same quarter
  • What is the nameplate capacity of bicycle plant ?
    o 3.5 lakh to 4 lakh per month
  • Does company will shrinking its supply to government because gross margin will be lower then others ?
    o No because volume comes from there and volume gives visibility .
    o Company is looking for a complete model and rationalise other models to reduce fix cost
  • How to look at operating leverage ?
    o Just set up a planned that has commissioned . Fine blanking volume is increasing and going to make expansion in existing plant
    o In large Diameter Tubes :- Come to break even on PBIT level on Q4substantially reduces losses from previous level
    o Looking on a product with higher margin and higher quality
    o So all these will lead margin
  • Can company get back in previous 4-5 % margin range ?
    o That it the target
  • What CAPEX one should expect ?
    o Around 150-200 Cr depending on the market trend
    o 300 Cr generated in cash flow so company has limit to do CAPEX of 150-200 Cr only.
  • What is company borrowing at standalone level ?
    o 687 Cr total borrowing and it went down by 75 Cr
  • From where growth is coming domestic or exports ?
    o Majorly from Domestic market
  • In company subsidiary Shanti gears revenue is improving but profit is decreasing so what is the reason for it ?
    o There is a problem in product mix average will be sustainable of 17-20 %
  • In company subsidiary Shanti gears from which sector clients are showing major interest ?
    o Off-road vehicle , Business in services gone up and improvement in steel sector
  • In company subsidiary Shanti gears Which product give higher margin standard or custom made ?
    o Custom made
  • In company subsidiary Shanti gears Which product is company selling more Standard or custom made ?
    o Standard , that depend on tender
  • What it the company outlook for exports taking US tax in consideration ?
    o Duty levied is having a dampening effect and reduce the sales .
    o Not looking US much in 2018-19 but company is developing in other markets
    o US contribute 100 Cr to sales
  • Would company gross margin and growth will maintain if steel price go up ?
    o It will not affected and recover can be made by customers
  • What is the capacity in tube division after expansion ?
    o 80-85 % after expansion
  • What is the current order book outstanding and total order inflow in FY18 for shanti gears ?
    o 130 Cr outstanding and total order inflow was 237 Cr for full year FY18
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It gives immense pleasure when you wish for a potential development in your investee company, and see that happening.

The cycles division of Tube Investment is their only consumer focused vertical which houses some big brands like Hercules, BSA etc. In the recent times growth in their cycles segment is stagnant. In fact the standard range which is used for commuting is de-growing, whereas the specials range which is used for fitness & leisure activities is growing in high single digits.

In this line I was thinking that TI Group could well leverage these brands to promote some fitness accessories since the fitness industry in India has started growing rapidly in recent years. But there were no indications regarding any developments on annual reports or con calls.

Then, I visited the online e-commerce portal of their retail brand ‘Track & Trail’ & found that they indeed have done exactly the same. They have extended their Hercules brand to launch fitness accessories (catalogue) under the avatar ‘Hercules Fitness’, which also has a dedicated website. These products are also available on Amazon & Flipkart.

I wonder why there are no explosive PR when this development has the potential to become a true game changer for Tube Investments. Is this just another case of Murugappa group’s conservative approach to keep investor enthusiasm at check?

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Tube Investments of India:

I am invested in the company from last 2 years.

Investment Rationale:

  1. Murugappa group company and Mr S Vellayan running the show.
  2. Major revenue comes from auto sector which is facing demand pressure, still company is showing resilience and able to grow bottom line impressively by cost cutting measures.
  3. Details of various cost cutting measures as provided in conf calls. Mr Vellayan summarized the initiatives very well, while answering one of the question in Q2 FY20 concall {see last answer on page 11}:
    http://www.tiindia.com/docs/Investor%20Call%20Transcript%20-%20Q2%202019-20.pdf
  4. Company has reduced debt significantly and should become debt free in next 3-4 quarters. Net debt 289 crores referred from Q2 FY20 concall.
  5. Margin improvement initiatives were started last years and will continue till FY23.
  6. Top line has been stagnant due to demand pressure in auto sector.
  7. Whenever auto sector turns around {I guess it should be soon}, top line growth should be the driver, as the margin improvement can sustain upto a level.
  8. ROCE has improved from 13% in FY18 to above 20% in FY19 and expected to continue above 20% if not improve further.
  9. Major beneficiary of corporate tax cut.

Risks:

  1. Steel as the raw material that might impact margins
  2. Auto sector dependency. During auto slowdown, Pressure from OEMs can force ancillaries to cut margins. Topline might remain muted if the slowdown persists.
  3. Electric vehicle shift in auto industry, can impact its products and in long term many OEMs might get busted which can be their current clients. This can be an opportunity as well as the new players will emerge and existing players will invest in e vehicles.

Valuations:
Company commands premium as its murugappa group company. If you see its price chart, it has almost doubled since beginning of 2018. A well discovered story and many funds invested in it. Stock price run up a lot post corporate tax cut. IMO, in long term it can be a compounder if management continues to execute.
Please correct if you find any ambiguity in my analysis.

Regards,
Yogesh

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Review by ICICI Direct

http://content.icicidirect.com/mailimages/IDirectInstinct_TubeInvestments.pdf

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New Initiative: Optic Lens

TII has identified optic lens and other vision systems for the automotive industry as a growth opportunity. As a first step, a plant to manufacture optical glass lens has been set up along with a technology partner. Acquiring capabilities to manufacture vision components would provide leverage towards climbing the value chain which supports multiple sectors and industries. The production is likely to be ramped up in the coming year.

This, along with TMT bars and the Truck Body Building businesses, are more like venture capital investments at the incubatory stage, which need time to grow and will therefore not have any significant impact either on the topline or bottomline in the near term.

  • Recrafted business strategy to accelerate growth through exports and expanding its presence in the spares, accessories and fitness segments.
  • Exited the institutional segment to manage cash-to-cash cycle better. In the institutional segment, the time from manufacturing the cycle to receiving payment was long ― from about six months to even one year. They were able to report better numbers on PBT and ROCE because of that exit,
  • Continue to focus on the economy range as they foresee value-seekers will grow in this segment.
  • In the higher value category, their plan is to broaden the alloy bike offerings and bring new products in the e-bike segment.
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Tube Investments of India said in an exchange filing that it has agreed to invest Rs 700 crore in fraud-hit CG Power and Industrial Solutions for a controlling stake. CG Power plans to issue shares worth Rs 550 crore and warrants worth Rs 150 crore to Tube Investments. It will issue the shares at a price of ₹8.56 apiece.
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The investment is, however, subject to TIIL being declared the winner of the Swiss challenge process to be undertaken by the lenders of CG Power by August 28. Under the Swiss challenge, other potential investors can make a counteroffer subject to the first investor (TIIL) have the right to match the counter offer.
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Tube Investments said the acquisition is likely to provide synergy for the companies as they are both engaged in engineering businesses. The annual report also said it is focusing on a set of businesses that can reduce the company’s dependence on the auto sector.

Update 27.05.20

CG Power has a debt of around Rs 2,500 crore to an SBI-led consortium of lenders which includes ICICI Bank, Axis Bank, IDBI Bank, Corporation Bank, and Canara Bank. CG Power & Industrial Solutions’ lenders were left disappointed as no suitors came forward to submit counter bids for the company as the deadline ended…
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As per the securities subscription agreement, Tube Investments would buy 64.24 billion shares at Rs 8.56 each for a total of Rs 550 crore to take a 50.62 percent stake in the company.
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"There are three components to Tube Investment’s offer, they are not paying everything upfront. Rs 650 crore is the cash component and about Rs 200 crore would be in the form of NCDs (non convertible debentures) and another Rs 150 crore through a property deal,” said another person involved in the matter.
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With no other offers, banks may have little choice but to accept the offer from Tube Investments, opined a bank executive.

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…the acquisition helps TII de-risk from the auto business, as it continues to be concerned about the cyclicality of that business and its position in it as a tier-2 supplier. CG Power also goes well with TII’s core stability of manufacturing high-quality industrial products… CG Power is among world’s top 10 transformer manufacturers, second in transformers and switch gears in India, and first in motors manufacture in the country. It caters to over 21 industries and has more than 20 manufacturing units.
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“That has been our overall approach, that we want to be a leading industrial player in the country, and so this gels well with that approach. Third is that we do believe that companies like CG Power basically fit well culturally with TII. We do believe that our approach of fairly prudent financial management, very strict and high corporate governance standards are something that will benefit CG Power in the long term and therefore is a good complement for what we have today,” TII officials told analysts.

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Is the acquisition done ? I can’t find anything on bse’s website regarding the same?

CG Power acquisition is still under process. CCI approval has been received. Now TI is organising EGM on 30th Nov for shareholders’ approval for investment in CG power and corporate guarantee to be provided to the lenders. Hopefully, entire process should be completed by Dec 2020.

Disc: Invested in CG Power

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Acquisition of CG Power concluded by TI and board of directors has been changed.

Very nice interview of Mr S Vellayan on CBNC

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