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Recovery in Engineering business expected in FY24

EV businesses moving from investment to commercialization phase We met with the senior management team of Tube Investments (TIINDIA) to get an update on the company’s core businesses and TI-2 strategy. It expects a good recovery in the Engineering business in terms of revenue and margins. The Metal Formed business is expected to grow 10%, assuming no material recovery in the Railway business. EV businesses are moving from the investment phase to the commercialization phase in FY24. Here are the key highlights from the meet:

* Engineering business to grow in double digits, with scope of margin expansion: The Engineering business is expected to grow in double digits over the next 2-3 years, driven by a recovery in the 2W segment and exports and a ramp-up in large diameter tubes. In FY23, the company saw good growth in 1HFY23, whereas 2HFY23 was affected by the pass-through of commodity cost decline and the impact of destocking on exports. In large diameter tubes, TIINDIA is expanding its capacity by 50%, which would be operational by FY24 end. It targets to improve PBIT margin through lean manufacturing initiatives and operating leverage.

* Metal Formed business to grow 10%: The Metal Formed business is expected to grow 10% over the next few years, without assuming any material recovery in the Railway business. The Railway segment is yet to see any material increase in tender activity. In roll formed products, the door frame segment will continue to grow well in line with key customers, whereas it is seeing good traction in other products for the 2W segment. The Fine-blanking business is also seeing good growth, driven by an import substitution opportunity. The Auto chain business, which focuses on the replacement market, should grow at a mid-single digit rate.

* Cycle business to recover in FY24, building capabilities for exports: Domestic cycle industry volumes fell 7-8% in FY23, whereas TIINDIA is expected to have seen a slightly higher decline. However, it expects some recovery in FY24. It focuses on exports and has been working on building capabilities. TIINDIA expects to see traction in cycle exports by FY24 end.

* The Industrial chains business (part of others) saw good growth in FY23 and is expected to continue to perform very well. After a long time, it is now setting up a greenfield plant.

* Optic Lens is still at the pilot stage and needs to stabilize some of the processes. It expects 3-4 quarters for stabilizing quality, cost, etc.

* EV businesses entering commercialization phase: Its EV businesses are near the end of capex phase and will enter the commercialization phase in FY24. It has already invested INR6.5b in EV businesses and plans to invest ~INR2.5b in FY24 to take products to market. While e-3W launches have started in southern states, e-CV production would start at its new Manesar plant in 1QFY24 and tractors would be launched at FY24 end.

Valuation and view:

* TIINDIA offers a robust growth story, driven by reasonable growth in the core business and by leveraging strong cash flows of the core business (TI-1) to systematically incubate future growth platforms (TI-2) and opportunistic acquisitions of stressed assets (TI-3) at attractive prices. TI-1 offers diversified revenue streams, with strong growth in the core business (~22% S/A PAT CAGR over FY23-25E), a ramp-up in CG Power, and optionality of new businesses incubated under the TI-2 strategy. The stock trades at 40x/32.7x FY24E/FY25E consol. EPS. We maintain our BUY rating and a TP of ~INR3,560 (premised on Jun'25E SOTP, based on 35x for the standalone business, valuing listed subsidiaries at 20% HoldCo discount and ~INR280 for two EV businesses).

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