Buy Gandhi Special; target of Rs 330: ICICIdirect

ICICIdirect.com is bullish on Gandhi Special Tubes and has recommended buy rating on the stock with a target price of Rs 310-330, in its research report dated January 06, 2015.

January 20, 2015 / 13:10 IST

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ICICIdirect.com's report on Gandhi Special Tubes

Gandhi Special Tubes (GST) is a leading manufacturer of small diameter seamless and welded steel tubes, which find application in automotive, hydraulics, refrigeration (condenser tubes) and other engineering services. With the CV cycle on the cusp of a cyclical recovery and the expected revival in construction/mining activity, we expect GST’s sales and PAT to grow at a CAGR of 16.8% and 23.9%, respectively, in FY14-17E.

Product segment catering to core industrial activity: GST’s product segment finds application in core economic activity with products catering to capex oriented industries viz. commercial vehicles (CVs) and construction & mining (hydraulics). In the automotive space, GST manufactures small diameter seamless steel tubes that are used as fuel injection tubes in the CV category. In the hydraulics space, the company manufactures small diameter seamless steel tubes, which are used in material handling equipment mainly used in mining & construction activity

Small diameter seamless tubes - dominant player, high margins business: Seamless tubes contributed a healthy ~68% to overall sales (FY14 sales of Rs 60 crore; total gross sales of Rs 89 crore). It is a key revenue contributor for GST, which has on a consistent basis commanded a healthy 60% share in total sales. Out of Rs 60 crore, ~Rs 30 crore (i.e. 33% of total sales) is realised from fuel injection tubes for CVs, in which GST enjoys a virtual monopoly. The company enjoys a healthy 30%+ EBITDA margins in this segment with competition to some extent from some Chinese players. End users of this segment include major CV players viz. Tata Motors, Ashok Leyland and M&M among others

"Lean balance sheet, key beneficiary of capex cycle revival: GST has a lean balance sheet with no debt and net cash & investments of Rs 65 crore as of FY14 (cash as a percentage of Mcap at ~20%). With a slowdown in the CV space coupled with low capacity utilisations, GST’s RoCEs, RoEs have declined to 13.8%, 11.2% in FY14, respectively. However, with the CV cycle on the cusp of a cyclical recovery and the expected revival in construction/mining activity, we expect GST’s sales and PAT to grow at a CAGR of 16.8% and 23.9%, respectively, in FY14-17E. We have valued the company at Rs 310-330, i.e. 14-15x P/E on FY17E EPS of Rs 22.4/share. Buy the stock", says ICICIdirect.com research report.