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Reinvesting cash flows for sustained growth

Proven management strength amplifies growth drivers | Initiate with BU

Tube Investments (TIINDIA) is a flagship company of the Murugappa group. It has a diversified range of products under its three verticals – engineering (57% of S/A FY22 revenue), metal forming products (19%), bicycles (15%) and others (9%). It is the market leader in manufacturing precision steel tubes under engineering vertical with ~60% market share in telescopic front fork suspension; it is a significant player in car door frames and the largest player in fragmented industrial chains segment (35% market share) under metal forming vertical. It is also the second largest player in bicycle business. We initiate coverage on the stock with a BUY rating and a TP of ~INR1,900.

Sound framework to drive 25% PAT CAGR and grow beyond auto parts

* Under leadership of Mr Vellayan Subbiah, TIINDIA has articulated the TI way of growth, with objectives of: a) delivering 25% profit CAGR over long term and b) moving away from being an auto component supplier only.

* The TI way of growth has three components – TI-1 (existing businesses), TI-2 (a venture capital style model) and TI-3 (a private equity style model based on acquisitions).

* The underlying philosophy is to invest cashflows of the existing businesses (TI-1), which does not need much capital for growth, to: a) seed several new platforms for long-term growth (under TI-2; e-3Ws, e-tractors, Optic lens, TMT bars and Truck body building), and b) acquire stressed assets (under TI3; acquired CG Power in Nov’20).

TI-1: Multiple growth drivers to fuel 25% PAT CAGR over three years

* TI-1 businesses, core businesses of Engineering, Metal Formed Products, Cycles, and Others form the foundation of TI’s growth framework as they are key growth drivers as well as providers of cashflowsfor investing in TI-2/3 strategy.

* Engineering business (~57% of S/A revenues) would see 16% CAGR (FY22- 25E) fueled by: 1) recovery in underlying auto industry, 2) strong traction in exports-driven geographical and product portfolio expansion, 3) import substitution opportunity in large diameter tubes for non-auto segment, and 4) launching new products like stabilizing bar for PVs in export market.

* Metal Formed Products business is likely to clock ~13% CAGR (FY22-FY25E) led by: 1) recovery in 2W industry for OEM drive chain and timing chain businesses, 2) fine blanking products for PVs, and 3) new orders for railway coaches upgradation program and Metro projects.

* Cycle business (~15% of revenues) is estimated to post 10% CAGR driven by strong growth in exports, whereas Others segment (~9% of revenues) is estimated to report 22% CAGR driven by ramp-up in lens business and recovery in the industrial chains business.

* Over the next three years for the standalone business, we estimate strong revenue/PAT CAGR of 16%/25% over FY22-25, respectively.

Valuation & View: Initiate coverage with a BUY rating

* TII offers diversified revenue streams, with strong growth in the core business (~25% CAGR), ramp-up in CG Power and optionality of new businesses incubated under TI-2 strategy.

* At consolidated level, we estimate revenue/EBITDA/PAT CAGR of ~15%/20%/ 20% over FY22-25, respectively, on a high base of FY22 where CG Power delivered robust performance. We estimate consolidated RoCE to improve by 470bp to 37.1% by FY25. We are not building in for any benefit from new ventures under TI-2 (except Lens business, which is part of Others) in our consolidated performance. Based on our DCF-based estimates, we see potential value of ~INR84 per share from e-3Ws and tractors businesses.

* The stock trades at 25.7x/20.6x FY23E/FY24E consol. EPS. We initiate coverage on the stock with a BUY rating and a TP of ~INR1,900 (premised on Mar'24E SOTP, based on 30x for the standalone business and valuing listed subsidiaries at 20% HoldCo discount).  Key risks: a) ‘Lean’ program execution for margin improvement, b) TI-2 strategy execution in new business areas, c) sustained turnaround of acquisition under TI-3 strategy, and d) upside risk to CG Power estimates.

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