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Revenue in-line with estimates

Tube Investment of India (TII) is a flagship company of Murugappa group. It is one of the leading product manufacture for major industries such as Automotive, Railway, Construction, Mining, etc.

Q3FY22 revenue grew by 4.3%QoQ. This was largely driven by double digit growth from the export market and 8%QoQ from CG power and Industrials

Despite inflated RM cost, TII margin improved 128bps QoQ owing to superior product mix and cost pass through benefit.

CG Industrial & Power Co, which provides power and industrial system related service in India and abroad, will continue to enhance TII product portfolio and revenue mix.

TII’s entry into 3W electric manufacturing, will mark the group’s foray into automobile manufacturer from a ancillary player. Due to supply shortage extended the launch to Q2FY23.

Given the strong fundamentals and strategic change adopted in the company’s segment mix, we value TII on a consolidated basis and recommend Accumulate with a target price of Rs1,746 at CMP.

Revenue supported by superior product mix

Q3FY22 revenue grew by 4.3%QoQ. This was largely driven by double digit growth from the export market and 8%QoQ from CG power and Industrials. The standalone business including shanti gears., which largely consist of the legacy business grew by 16% YoY(0.8% QoQ). Out pacing the auto industry growth. The company reiterated that the export share in the engineering business (larger pie) is currently 20% and likely to grow to 30% in 2-3 year, and for industrial business 40% coming from export. Targeting overall 30% share in the export business in the medium term.

Long term growth strategy intact

TII’s long term strategy to insulate itself from the cyclical nature of the auto sector through organic, inorganic growth and entering into new venture such as an EV OEM is largely in place for the company. The growth share in the export market for legacy products like engineering and TI cycles are growing in double digit due to entering newer geographies and having export incentives. The Acquisition of debt ridden CG power (52.6% stake) has become positive and registered a consolidated profit of 28%YoY. The company is well positioned to take the benefit of CG power’s market leadership globally. It is the world’s top 10 transformer manufacturer, and in India, it is a leader in motor and holds the second position in switch gears. The company has set a modest target of Rs.5000cr of revenue and Rs500cr PBT in four to five years for CG.

Foray into Electric 3W manufacturing & Optic lens

TII’s entry into 3W electric manufacturing with an outlay of Rs200cr will also mark the group’s foray into complete automobile manufacturing. The technology and the prototype of EV three wheeler has already been developed and will be a combination of in house as well as design support from a Korean company. Due to semi conductor shortage, the company has extended the deadline to launch the vehicle in Q2FY23 from Q4FY22. The company has also made a small foray into optical lens or vision products for automotive and other industries. On an initial phase, existing plant has already been setup for a capacity of half a million lenses a month and running for its certification process with an anchor customer.

Valuations

We expect TIIs diversified approach to de-risk from auto sector and concentrate more on other industrial segments like railways & powers through inorganic form to support long term revenue visibility. Additionally, Government’s PLI scheme and China plus strategy by major international OEMs to bring incremental growth for medium term. We rollover and value TII on a consolidated basis, with a P/E of 26x FY24E EPS and recommend Accumulate rating with a target price of Rs.1,746 at CMP

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