Hold TRF; target Rs 350: PINC Research

“TRF reported operationally better Q2FY12 results. Net sales on a consolidated basis increased by 38% to Rs 2.7bn (PINCe Rs 2.9bn). Margins at operating level were at 8.7% (after adjusting forex loss). Higher interest and unrealised foreign exchange loss impacted bottom line adversely. TRF reported PAT of Rs 26mn. Adjusted PAT was Rs 95mn (PINCe Rs 60mn). The company, in this quarter too, failed to bag any major order which further reduces FY13 revenue visibility. However, the current L1 positions stood at Rs 5bn. The product division and subsidiaries continue to perform well.”

“TRF’s Q2FY12 consolidated revenue increased by 38% on a consolidated basis to Rs 2.7bn mainly on account of high growth witnessed in product division. Operating margins were at 8.7% (after adjusting for unrealised forex losses). Project division witnessed a growth of 24% in revenues and incurred a loss of Rs 11mn at PBIT level. However, on SA basis product division witnessed a growth of 18% in revenues to Rs 685mn and 29% in profits at PBIT level to Rs 137mn. Margins at PBIT level improved by 205bps to 20%. We believe margins in the standalone product division to sustain at the current levels going forward. The subsidiaries witnessed a cumulative revenue growth of 71% in Q2FY12 to Rs 1.4bn. PBIT margins declined by 54bps to 5.6% for the quarter (after adjusting Rs 56mn of unrealised foreign exchange loss pertaining to this segment). With expected improvement in margins and healthy revenue growth driven by expanded capacities coming on stream, we believe the automotive segment would be the key growth driver for the company going forward.”

“In Q2FY12, no major orders were bagged by TRF in the project division. This is the fifth consecutive quarter where TRF has not bagged any major order in the project division. The current consolidated order book of the company at Rs 12.8bn is down by 33% on a YoY basis. Project order book stands at Rs 11.3bn and product at Rs 1.5bn. Management has announced L1 positions worth Rs 5bn from NTPC and expects order worth Rs 3bn from Tata Steel Kalinganagar project in the coming months. Margins are expected to remain under pressure going forward. We expect TRF to witness sales CAGR of 17% (FY11-13E). Order inflows from NTPC and the Kalinganagar project of Tata Steel could provide some respite. The key triggers remain acceleration in order inflows and margin improvement in automotive business. Debt equity ratio increased to 2.4x at the end of Q2FY12. Considering the price correction witnessed in the stock in last few months we believe there is limited downside. We upgrade the stock to ‘HOLD’ from ‘SELL’ and maintain our target price of Rs 350 (8xFY13E),” says PINC Research report.

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