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MOSL: TUBE INVESTMENTS (Buy) -INITIATING COVERAGE: Reinvesting cash flows for sustained growth

TUBE INVESTMENTS | INITIATING COVERAGE: Reinvesting cash flows for sustained growth

(TIINDIA IN, Mkt Cap USD3.8b, CMP INR1516, TP INR1900, 25% Upside, Buy)

Tube Investments (TIINDIA) is a flagship company of the Murugappa group. It has a diversified range of products under its three verticals – engineering (57% of S/A FY22 revenue), metal forming products (19%), bicycles (15%) and others (9%). It is the market leader in manufacturing precision steel tubes under engineering vertical with ~60% market share in telescopic front fork suspension; it is a significant player in car door frames and the largest player in fragmented industrial chains segment (35% market share) under metal forming vertical. It is also the second largest player in bicycle business. We initiate coverage on the stock with a BUY rating and a TP of ~INR1,900.

Sound framework to drive 25% PAT CAGR and grow beyond auto parts

• Under leadership of Mr Vellayan Subbiah, TIINDIA has articulated the TI way of growth, with objectives of: a) delivering 25% profit CAGR over long term and b) moving away from being an auto component supplier only.
• The TI way of growth has three components - TI-1 (existing businesses), TI-2 (a venture capital style model) and TI-3 (a private equity style model based on acquisitions).
• The underlying philosophy is to invest cashflows of the existing businesses (TI-1), which does not need much capital for growth, to: a) seed several new platforms for long-term growth (under TI-2; e-3Ws, e-tractors, Optic lens, TMT bars and Truck body building), and b) acquire stressed assets (under TI-3; acquired CG Power in Nov'20).

TI-1: Multiple growth drivers to fuel 25% PAT CAGR over three years

• TI-1 businesses, core businesses of Engineering, Metal Formed Products, Cycles, and Others form the foundation of TI's growth framework as they are key growth drivers as well as providers of cashflows for investing in TI-2/3 strategy.
• Engineering business (~57% of S/A revenues) would see 16% CAGR (FY22-25E) fueled by: 1) recovery in underlying auto industry, 2) strong traction in exports-driven geographical and product portfolio expansion, 3) import substitution opportunity in large diameter tubes for non-auto segment, and 4) launching new products like stabilizing bar for PVs in export market.