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Core business exports ramping-up well

Plans launches in e-mobility in FY23, forays into new businesses

TIINDIA’s FY22 annual report highlights: a) the progress made in the core business, particularly in exports, b) capability improvements in the core business, c) strategy on e-mobility, and d) its plans to foray into Medical Devices and Electronics under its TI-2 strategy. The management’s focus is on deliverance of four metrics – revenue growth (up 106% YoY in FY22), profitability (up 100bp in EBITDA margin), RoIC (up 22.3pp to 42.7%), and FCF (~INR6.4b in FY22 v/s INR1.1b in FY21).

Engineering products: Strong growth led by the doubling of exports

* Domestic tube volumes grew 18% YoY in FY22. The CRSS business/large diameter tubes grew 14%/26% YoY in FY22. Export volumes grew 98% YoY in FY22.

* The management continues to work with OEMs on dedicated projects, with a focus on innovative and import-substitute products and new product development. This, coupled with its capability building and focus on regional balancing strategies, enables it to explore opportunities in new and emerging applications.

* In large diameter tubes, it added customers by improving its capabilities in manufacturing premium quality high precision hydraulic cylinder tubes. It saw good growth in both the domestic and EU markets.

Metal Formed products – Good growth despite a muted Railway segment

* Growth in the Metal Formed products business was driven by the Auto segment. Demand from the Railways segment was muted due to the impact of the COVID-19 pandemic.

* Doorframe sales grew 11%, led by good traction in select models from its key OEM customers. Apart from bagging an order for a new model of doorframes, it is also focusing on increasing volumes in cross car beams, divisional challenges, etc. to boost growth.

* In Fine Blanked products, it has a three-pronged approach for customer engagement, product innovation, and value addition to enhance growth. An innovative range of safety-critical products for the Auto industry enabled the business to grow in the domestic and overseas markets.

* In Auto Chains, TIINDIA consolidated its preferred vendor ranking with OEMs and Auto majors. The management’s strategic approach on aftermarket delivered growth, with region-wise, product-wise, density-mapped expansion into the under-served Tier I and II cities, and increasing channel bandwidth to address growth clusters in micro markets.

* The Railway segment will benefit from the ‘National Rail Plan for India – CY30’ to create a fully modernized Railway system. TIINDIA’s IRIS certification, an international accreditation necessary to serve the Railway industry globally, will enable access to global markets.

Export-led growth in Cycles, despite a decline in the domestic market

* The domestic Cycle industry (trade) declined by 13% in FY22 as both Standards and Specials fell at a similar rate. Domestic trade volumes for TIINDIA fell 6.6% to ~2.06m cycles, whereas exports/e-commerce grew 23%/over 100% in FY22. As a result, its market share expanded by 1.8% to ~26% in FY22.

* The decline in the domestic Trade segment was due to: a) a lack of sustenance of the cycling euphoria seen in CY21, and b) downtrading due to price hikes in the Mass/Economy segment benefiting unorganized players.

* Its thrust on the Specials segment continues with frequent product launches, product innovations, enhanced digital marketing, and superior consumer experience via exclusive retail outlets under its exclusive retail brand ‘Track & Trail’.

Over 140% growth in exports led by the Engineering business

* The management’s focus on increasing the share of exports in each of its businesses translated into a 141% growth in export revenue, with exports constituting 20%/40% of revenue from the Engineering/Industrial Chain business.

* It is developing OEM partnerships and distributor channels to increase its presence in overseas markets. The majority of its exports are to the US and EU markets.

* In the Engineering business, it is working closely with global Auto manufacturers and OEMs in the development of new-gen tubular products and solutions, using new grades of steel and innovative process design to address emerging demands in light-weighting and fuel efficiency. The business expanded its global footprint in North America, EU, and ASEAN markets.

* It increased exports from the Cycle business by capitalizing on opportunities in the Micro Mobility Vehicle and Fitness space. It has also boosted its manufacturing capability to aggressively push the export of cycles into new geographies.

Building capabilities and capacities for growth in its core business

* In the Engineering business, it has established a world-class tube mill at its plant in Chennai using advanced process technology to manufacture premium tubular products, with close tolerance and high tensile strength, to offer light-weight solutions. This capacity unlocking will help meet its growing export order pipeline. To meet domestic demand, it has embarked on Phase III expansion for CDW tubes at Rajpura (Punjab), given its close proximity to the Auto OEM cluster in North India.

* In the Auto Chains business, it began operations at its new assembly center in Aurangabad in FY22 to meet demand from OEMs and the aftermarket in the northern region.

* For industrial Chains, it is investing in a new greenfield plant at Tiruttani (Tamil Nadu), with advanced process technology for manufacturing leaf chains. A new assembly line for the high-performance series was established at Ambattur (Tamil Nadu).

TI-2: Plans EV launches in FY23, decides to foray into Medical Devices and Electronics

* The management is focused on the productive end of the spectrum, where the vehicle is used as an asset to earn income. It has chosen 3Ws and Tractors for its venture, where the value accrual to the owner is greater. This will accelerate the adoption and market penetration of electric products in their served segments.

* It plans to launch electric 3Ws (2QFY23) and Tractors in FY23. It has set up an e3W plant in Chennai. While e-Tractors will be initially manufactured at Bengaluru, it will eventually be produced from its plant in Chennai.

* The e-3W products will be launched under the brand Montra Electric, with an exclusive and expansive distribution and service network, and by accessing B2B channels. e-Tractors will be launched under the brand Cellestial Egati.

* For e-3W, it initially plans to have three variants each in the Passenger/Cargo and e-Rickshaw segment. For e-Tractors, it is developing two variants to address the varied power needs.

* Cellestial E-Mobility is currently building seven prototypes, with different mechanical variants catering to different customer and industry segments. While product testing is underway, a roadmap has been prepared for product variations and new product/platform development. Distribution partners are also being on boarded.

* TIINDIA has decided to foray into Medical Devices and Electronics in the near future. Going forward, it will work on collaborative ventures with its subsidiaries for greater efficiency gains.

Other highlights

* Its industrial chain customer roster expanded with the acquisition of key global manufacturers and OEMs in the domestic and overseas market. Export growth was driven by partnerships with OEMs on strategic projects and leveraging deeper synergistic alliances and project ventures with SEDIS.

* The management has identified a list of 25 projects for productivity improvement, changeover time reduction, inventory reduction, cycle time reduction, facilitating line integration, and implementation of a ‘one piece flow’ using LEAN concepts.

* It has acquired a 27.8% stake in Aerostrovilos Energy for ~INR35m. Aerostrovilos is a startup engaged in the development of micro gas turbine technology for power generators and automotive applications using alternate fuels.

Highlights from the financial statements

* Standalone revenue/EBITDA/adjusted PAT grew by 49%/ 39.5%/61% in FY22. EBITDA margin contracted by 80bp to 11%, impacted by commodity prices in its Engineering business (down 270bp to 12.6%).

* Revenue growth was driven by the Engineering business (+67%) and Others (+117%). While PBITDA margin fell 270bp for the Engineering business, it improved for Metal Formed (+220bp) and Others (+80bp)

* Standalone (pre-tax)/core RoCE improved by ~540bp/~14.3pp to 24.7%/46.5%.

* Core standalone working capital days turned adverse in FY22 (to +15 days from a negative two days), impacted by a reduction in payable days to 66 days from 98 days.

* Standalone CFO declined by 51% to ~INR3.3b, impacted by a swing in the working capital (of ~INR5.3b). Capex was marginally lower ~INR1.2b, resulting in a FCF generation of ~INR2.1b (v/s INR5.35b in FY21).

* Dividend payout stood ~14.5% of standalone PAT, or ~7% of consolidated PAT.

* Consolidated revenue/EBITDA/adjusted PAT grew 106%/126%/206% in FY22, driven by a full-year consolidation and a sharp turnaround in CGPOWER.

Valuation and view

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

* At the consolidated level, we estimate a revenue/EBITDA/PAT CAGR of ~16%/21%/22% over FY22-25 on a high base of FY22, where CGPOWER delivered a robust performance. We expect consolidated RoCE to improve by 560bp to 38% by FY25. We are not building in any benefit from new ventures under TI-2 (except the Lens business, which is part of others) in our consolidated performance. Based on our DCF-based estimates, we see potential value of ~INR87 per share from the e-3W and Tractor business.

* The stock trades at 33.2x/26.5x FY23E/FY24E consolidated EPS. We maintain our Buy rating with a TP of ~INR2,230 per share (premised on Sep'24E SoTP, based on 30x for the standalone business and valuing listed subsidiaries at a 20% holding company discount).

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