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MOSL: TUBE INVESTMENTS OF INDIA: Strong revenue growth driven by the Engineering business

TUBE INVESTMENTS OF INDIA: Strong revenue growth driven by the Engineering business

(TIINDIA IN, Mkt Cap USD5.2b, CMP INR2115, TP INR2380, 13% Upside, Buy)

EVs is a big focus area under its TI-2 strategy, with plans to cater to the four segments

• Performance in 1QFY23 was driven by strong revenue growth, particularly in the Engineering business. Traction in revenue is expected to continue, driven by a recovery in underlying Auto volumes, traction in Railways, and continued ramp-up in exports. It will invest INR10b (INR2.5b each) in four segments (excluding 2Ws) for taking EVs to the market.
• We have maintained our FY23/FY24 estimates and our Buy rating with a TP of INR2,380 (Sep'24E SoTP based).

Lower gross margin partially offset by operating leverage

• Standalone revenue/EBITDA/adjusted PAT grew 56%/29%/38.5% YoY to INR19.6b/INR2b/INR1.3b. Revenue growth was driven by the Engineering business, which grew 53% YoY.
• Gross margin contracted by 6.5pp YoY and 1.7pp QoQ to 32%. EBITDA grew 29% YoY to INR2b (in line). EBITDA margin declined by 2.1pp YoY, but grew 30bp QoQ to 10.4% (est. 10.9%). This was due to a lower gross margin, but the same was partly offset by operating leverage.
• PBIT margin for the Engineering business stood at 9.5% (est. 11%) v/s 10.2% in 1QFY22. The same for the Metal Formed product business stood at 11.5% (est. 12%) v/s 10.7% in 1QFY22. PBIT margins for the Mobility business stood at 3.9% (est. 5%) v/s 4% in 1QFY22, and for the others business stood at 7.6% (est. 3%) v/s 11% in 1QFY22.
• Consolidated business revenue/EBITDA/adjusted PAT grew 56%/47%/83% YoY to INR38b/INR4b/INR2.5b (est. INR24.4b/INR2.8b/INR1.35b).

Highlights from the management commentary

• Strong growth in the Engineering business was driven by some market share gains and pass-through in commodity cost.
• The Railways business has started to see traction in new tenders, with better price points.
• Exports stood at 16% of standalone sales and 21% for the Engineering business in 1QFY23. Exports from the Engineering business were impacted by a build-up of too much inventory in the EU. However, the management expects a pick-up from 2HFY23. The Engineering business has received approval from OEMs in the export markets. Industrial Chains clocked a good growth in exports.
• EVs remain the biggest focus area in its TI-2 strategy. It will need to have four platforms (of which three - in 3Ws, CVs, and Tractors - already exist). It sees opportunity in the fourth platform. It has no plans to enter the 2W space as it is too crowded a market. It is looking to invest INR2.5b per platform (total INR10b) to take these platforms to the market.

Valuation and view

• TIINDIA offers diversified revenue streams, with strong growth in the core business (~19% CAGR), ramp-up in CGPOWER, and optionality of new businesses incubated under its TI-2 strategy.
• The stock trades at 35.9x/27.6x FY23E/FY24E consolidated EPS. We maintain our Buy rating and TP of ~INR2,380 (premised on Sep'24E SoTP, based on 30x for the standalone business and valuing listed subsidiaries at a holding company discount of 20%)