Aditya Birla Money is bullish on Tube Investment and has recommended buy rating on the stock with a target of Rs 188 in its February 11, 2013 research report.
“Tube Investments of India Ltd. (TI) Q3FY13 results were below expectations on the standalone front due to (1) a sharp drop in sales volumes and (2) higher power costs. However, its financial services subsidiaries -- Cholamandalam Investment & Finance Company Ltd. (CIFCL) and Cholamandalam MS General Insurance Co. Ltd. continued to post a strong set of numbers.”
“TI’s Q3FY13 consolidated net profit grew 22.7% YoY to `681.7mn on account of strong performance of its financial services subsidiaries: CIFCL and Cholamandalam MS General Insurance Co. Ltd.. CIFCL’s net profit for the quarter grew 98.0% YoY to `814.0mn. CIFCL’s net loan book for the quarter grew 42.0% YoY to `156.9bn while its GNPA and NPA continued to be low at 1.17% and 0.63%, reflecting quality growth. CIFCL’s RoE increased from 14.21% in Q2FY13 to 20.23% in Q3FY13. Cholamandalam MS General Insurance Company Ltd. registered a growth of 12% YoY in gross written premium during the quarter. Its PAT grew 700% YoY to `160mn. On a standalone basis, TI’s net sales declined 13.0% YoY and 17.7% QoQ to `7.6bn on account of a (1) sharp drop in sales volumes across its business divisions and (2) pricing pressure in its bicycles division. Volumes declined in the engineering and metal formed products divisions on account of a slowdown in the automobile sector while in the bicycles division volumes declined owing to lower consumer demand in the trade segment and lower institutional sales as most of the yearly institutional sales were booked in Q2FY13. The YoY% change in volumes were as follows: Engineering division (mainly precision tubes) declined 9%, car doorframes declined 9%, autochains grew 1% in the OEM segment, industrial chains declined 15% and bicycles declined 18% in the trade segment.”
“On account of lower-than-expected sales volumes and pricing and cost pressures, we reduce our earnings estimates for FY13E and FY14E for the standalone business (Refer Table-1 on Page-2 for change in volume assumptions). We cut our FY13E and FY14E EPS by 33.7% and 30.7% to `5.9 and `6.6 respectively. For our SOTP valuation of TI, we ascribe a higher valuation of 2.0x equity investment to TI’s general insurance subsidiary -- Cholamandalam MS General Insurance Company Ltd -- from 1.5x earlier on account of continued significant traction in the business and achievement of sustainable profitability. We note that our valuation for TI’s general insurance subsidiary has upside risks as the FDI limit of 26% in insurance is hiked to 49% over time. With the RoE gap between CIFCL and its NBFC peers Mahindra & Mahindra Financial and Shriram Transport Finance reducing considerably, we now value CIFCL at a 25% discount to the average FY13E P/B of the above-mentioned peers (from 40% discount earlier on the average FY12 P/BV of its peers).”
“On the other hand, taking a conservative approach, we increase the holding company discount from 30% earlier to 40% to value TI’s investment in CIFCL. For valuation of standalone TI, we roll over our 1 year forward P/E multiple of 12x from FY13E to FY14E. With the revision of TI’s standalone business’ earnings estimates downwards, higher valuation for TI’s general insurance and NBFC subsidiaries and quarterly rollover of our 1 year forward SOTP value, our 1 year target price decreases by ~6.5% to `188 per share (Refer Table-2). Our target price of `188 implies a potential upside of 10.6%. We downgrade our rating on TI from BUY to Accumulate,” says Aditya Birla Money research report.
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