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Slow ramp in the electric vehicle business

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

• Q2FY24, consolidated revenue grew by 14.0% YoY, driven by Industrial, Metal Forming and Engineering segments. However, bicycle demand continue to witness negative growth.

• TII’s margin contracted by 61bps YoY owing to deleveraging and increase in employee cost.

• Sales for e-3Ws have commenced with an annual capacity of 19,000 units. Sales started for 3-W at a moderate space and currently concentrating on the southern states. Whereas, E-tractor & E-trucks at its homologation stage.

• Foreseeing government infrastructure spending, TII is expanding its capex on large diameter tubes with an estimated value of Rs140cr and expects to generate a revenue of Rs400cr.

• We believe most of the positivity's have been factored in the price and expect consolidation in the valuation for near term. We value TII on 43x FY25E EPS recommend sell rating at CMP.

Revenue supported by superior product mix.

In Q2FY24, consolidated revenue grew by 14% YoY, driven by the Power & Industrial, Metal Forming, and Engineering segments. However, commodity pass through and sluggish cycling division restricted the full benefit on a standalone. TII’s margin contracted by 61bps YoY owing to high employee cost and operating deleverage, while improved QoQ due to superior product mix and export. The company reiterated that due to the fag end and some inventory pile up, there was a little bit of de-stocking at the global level. However, at a broader level, export share in the engineering business (the larger pie) is currently 20% and likely to grow to 30% in 2 years. For industrial businesses, 40% comes from export, targeting an overall 30% share in the export business. PAT grew by 15%YoY

Long term growth strategy intact

TII’s long term strategy to insulate itself from the cyclical nature of the auto sector through inorganic growth and entering more into engineering and industrial is benefiting the company. As of now, capacity utilization is at its optimum level. Foreseeing the infrastructure spend by the government, TII is expanding its standalone or T1 capex on large diameter tubes with an estimated value of Rs140cr and expects to generate a revenue of Rs400cr. The growth in industrial power, or T3 business, is consistently delivering strong double digit growth and holds 45% of the overall revenue pie. The company is well positioned to take advantage of CG Power’s market leadership globally. To expand more on the T2 venture strategy with an objective of future GDP growth, the recent foray into the pharma business through the acquisition of Lotus Surgical and CMDO businesses will result in a more diversified business in the long run.

Delay in expansion from new products

The technology and the prototype of Montra e-3Ws have already been approved. There was a delay in the launch due to new battery safety standards introduced by the government and supply side. While, having an order book of 1.5 months. Currently, TII is planning to launch in the southern states, where it has appointed 42 dealers , and planning to expand to 72 dealers by FY24.. Secondly, the agreement with JB Auto for manufacturing the E-Truck segment is running as per schedule, and the initial homologation is expected by Q1FY25 with an annual capacity of 2,500 ETrucks. Additionally, expansion in e-Tractors and E-3w –by 19,000 & 25,000, respectively

Valuations

TIIs has a diversified revenue stream with strong growth in the core sector, and industrial segments like railways & power through inorganic form continue to support long term revenue visibility. However, delay in the EV ramp up is not supporting the current valuation. We value TII on a long term avg. basis, with a P/E of 43x FY25E EPS, and recommend sell rating with a target price of Rs.2855 at CMP.

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