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Operationally in line; mobility business dents margin

Recovery in underlying 2W volumes and exports to aid margins

* TII’s 2QFY24 results were operationally in line, while a surge in other income led to Adj. PAT beat at INR1.8b (vs. est. INR1.7b). During the quarter, all divisions, except for the mobility business, reported a YoY revenue growth. We believe, underlying growth in 2W and exports should drive revenue and margins recovery over the next few quarters to over 14% by 4QFY24.

* We maintain our FY24E/FY25E consolidated EPS estimates. The stock trades at 53.2x/44.2x FY24E/FY25E consol EPS. We reiterate a BUY rating on the stock and a TP of ~INR3,630 (premised on Dec’25 SoTP).

Engineering and Metal Formed business volumes grew 13-14% YoY

* Tube Investments’ SA revenue/adj.PAT grew 3%/13% YoY to INR19.7b/INR1.8b (vs. est. INR19.5b/INR1.7b) and EBITDA remained flat YoY to INR2.5b. Engineering business (~65% of the S/A business) grew 7% YoY (vs. est. growth of ~5% YoY). 1HFY24 revenues declined 3% YoY, but EBITDA/adj. PAT grew 3%/12% YoY.

* Gross margin declined 50bp YoY to 36.3%. EBITDA margin declined 40bp YoY (up 60bp QoQ) to 12.8% (vs. est. 12.5%). Factors such as operating efficiency, product mix, and exports led to sequential margin expansion.

* Further, Adj. PAT stood at INR1.8b (up 13% YoY vs. est. INR1.7b). ? Revenue for the Mobility business declined 22% YoY to INR1.8b. PBIT margin for this business stood at -1.7% (vs. up 4.4%/1.1% in 2QFY23/1QFY24 and est. 2%).

* Revenue for the engineering business grew 7% YoY to INR12.7b. PBIT margin for this business stood at 13.3% (vs. 13.8%/11.8% in 2QFY23/1QFY24 and est. 12.3%).

* Revenue for the Metal Formed Product business grew 8% YoY to INR4b. PBIT margin for this business stood at 13.4% (vs. 12.9%/12.8% in 2QFY23/ 1QFY24 and est. 12.8%).

* Revenue from the Others business vertical grew 10% YoY to INR2.1b. PBIT margin for this business stood at 8.4% (vs. 4.3%/9% in 2QFY23/1QFY24 and est. 7%).

* CFO/FCF in 1HFY24 declined ~2%/20% YoY to INR3.4b/INR2b. The company incurred a capex of INR1.4b in 1HFY24 (vs. INR0.9b in 1HFY23). Cash and cash equivalent as of Sep’23 stood at INR239.2m (vs. INR99.6m as on Sep’22). FCF for 2QFY24 stood at INR1.08b.

* Consol. business revenue/EBITDA/adj. PAT grew 14%/9%/20% YoY to INR43.1b/INR5.6b/INR3.5b (vs. est.INR32.6b/INR3.8b/INR2b).

Highlights from the management commentary

* Volume grew 13-14% YoY during the quarter, encompassing both the engineering and metal business. Revenue had some pass-through effect of steel price changes. The growth was primarily driven by both PV and CV segments, while 2W demand remained subdued. Additionally, the company’s focus on non-auto sectors and exports contributed significantly to the growth. Exports is currently 14-15% of the revenue, similar to that in FY23.

* Engineering division- Expect a growth rate of 12-15% over the next three to five years. The company has successfully gained market share and it will continue to look for opportunities for growth. While there were some challenges in the export market until the last quarter, there has been a sequential growth in exports. However, there was a decline in exports on a YoY basis.

* EVs: Seeing MoM growth in volumes of e3Ws. Cumulatively, the volumes have been doubling up every month. However, there are challenges in the supply chain for EV components. Currently, the company has an order book stretching over 1.5 months. The company has expanded its dealership in Northern regions such as Kanpur, Dehradun, and Lucknow. Expect to have dealer strength of 72- 73 by the end of the year vs. 42 dealers now.

* Large part of the capex will be used for TI1 and TI2 opportunities. The company has identified a list of pipeline opportunities that represent potential areas for deploying available cash. The TI-1 and TI-2 would consume capex of over INR4b annually.

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