Buy Tube Investments of India Ltd for the Target Rs.3,315 by Motilal Oswal Financial Services Ltd
Earnings beat, led by the engineering business
GST rate cuts and ramp-up of new plants to drive growth
* Tube Investments (TIINDIA)’s 3Q adj. PAT at INR2b came in 9% ahead of our est. due to a margin beat in the engineering business at 13.6% (est. of 12%).
* TIINDIA offers diversified revenue streams, with healthy growth in the core business (~11% S/A PAT CAGR over FY25E-28E), in CG Power, as well as the optionality of new businesses incubated under the TI-2 strategy. Adjusted for stakes in CG Power and Shanti Gears, the standalone business is attractively valued at 8.2x / 7.5x FY27E/FY28E EPS. We reiterate our BUY rating with a TP of ~INR3,315 (premised on Dec’27E SoTP; our valuation is based on a 24x PER for the standalone business, valuing the listed subsidiaries at a 30% HoldCo discount).
Earnings above est., led by a margin beat in the engineering segment
* TIINDIA’s standalone revenues grew ~13% YoY to INR21.5b (in line) ? EBITDA margins expanded 170bp YoY to 14.4% (150bp ahead of our est.), led by better-than-expected performance by the Engineering division. ? Segmental performance:
* Mobility business revenues grew 29% YoY to INR1.8b (3% ahead of our est), EBIT margins improved 280bp YoY to 2.2% vs. our est. of 2.4%. ? Engineering business revenue grew 18.6% YoY to INR14.3b (3% above our est), EBIT margin improved 70bp YoY to 13.6% and beat our est. of 12.0%. ? Metal-formed business revenue grew 2% YoY to INR4b (in line). The EBIT margin improved 20bp YoY to 11.3% vs. our est. of 11%.
* Other business revenues declined 15.3% YoY to INR2.1b (9% below our est), EBIT margins improved 440bp YoY to 8.9% vs. our est. of 8%. ? EBITDA grew 27.3% YoY to INR3b (13% ahead of est.).
* The company incurred a one-time expense of INR150mn on account of changes in the labor code.
* Adjusted for this, PAT stood at INR2b, up 25% YoY (9% above our estimate).
* FCF for the standalone business in 3Q stood at INR2.5b, and annualized RoIC stood at 49%
Highlights from the management commentary
* The railway order, which was expected to be commissioned by 4QFY26, is experiencing a delay of about one quarter due to a lack of readiness among other suppliers.
* TIINDIA may look to invest about INR5.0-7.5b in TICMPL from the standalone cash flows.
* Its target would be to achieve a break-even in e-3W and HCV segments over the next 12-18 months and then look at break-even in the other two segments.
* Its two key focus areas in this business include: 1) focus on reducing the BOM cost, which will aid TII to position its products more competitively, and 2) expand channel and network presence pan-India.
* Management confirmed that it would focus on the current TI-2 projects and not look at any further incremental avenues. It may consider TI3 opportunities if the same fits their requirements.
Valuation and view
* TIINDIA offers diversified revenue streams, with healthy growth in the core business (~11% S/A PAT CAGR over FY25E-28E), growth in CG Power, and the optionality of new businesses incubated under the TI-2 strategy. Adjusted for stakes in CG Power and Shanti Gears, the standalone business is attractively valued at 8.2x / 7.5x FY27E/FY28E EPS. We reiterate our BUY rating with a TP of ~INR3,315 (based on Dec’27E SoTP; our valuation is based on 24x PER for the standalone business, valuing the listed subsidiaries at a 30% HoldCo discount).
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