Tube Investments Of India - A Case Of Interesting Valuations

Founded in 1900, the Murugappa Group is one of India's leading business group. The Group has 28 businesses including 11 listed Companies traded in NSE & BSE. Headquartered in Chennai, the major Companies of the Group include Carborundum Universal Ltd., Cholamandalam Investment and Finance Company Ltd., Cholamandalam MS General Insurance Company Ltd., Coromandel International Ltd., Coromandel Engineering Company Ltd., E.I.D. Parry (India) Ltd., Parry Agro Industries Ltd., Sabero Organics Ltd., Shanthi Gears Ltd., Tube Investments of India Ltd., and Wendt (India) Ltd.

In 1959, Tube Investments of India (TII) was formed by merging TI Cycles of India and Tube Products of India. TI Diamond Chain was merged with the parent company, in 2004. In 1962, the company saw a potential to leverage its engineering skills to address the market for roll formed metal products. So a new unit called TI Metal Forming was created to realize this potential. TI Diamond Chain was merged with the parent company, in 2004.

In the six decades of its existence, TII has built significant skills in engineering and metallurgy, which is fully supported by a central R&D function. A Total Quality Management approach has ensured a satisfied community of customers and TII is the preferred supplier in all the markets it operates. TII continues the tradition of financial discipline and prudence set by the founding fathers. It is this tradition that has earned TII the unique distinction of uninterrupted dividend distribution since 1954.

Company's Wide & Impressive Divisions:

1) Cycle & Cycle Components:
TI Cycles have introduced fun and entertaining stores across the length and breadth of India. The company has been proactive and was first bicycle company to change the cycle retail landscape, both in urban and rural areas. With the first urban store in 2007, Hercules is sold in over 200 exclusive urban stores known as 'BSA Hercules Exclusive Stores' which have revolutionized the way people buy bicycles in India. These stores are a one-stop premium shop for all Hercules, BSA & Montra products and have a customer friendly ambiance which serves as a model for other bicycle outlets in the country. In 2010, the company started “Hercules BSA Cycles” to provide the urban retail buying experience in smaller towns. In just over a year’s time, there are over 200 of these rural stores. For its retail innovation, the company received the certificate of appreciation for 'Excellence in Rural Retailing' at the ET Retail Awards 2011.
TI Cycles has plants at Chennai, Nasik and Noida, major Warehouses at Guwahati, Durgapur, Patna and Cuttack and regional offices, through which it serves it nationwide 2500 plus dealer network. Certified with ISO 9001:2000, OSHAS 18001-2007 and ISO 14001-2004, TI Cycles is a quality and customer centric organization.

2) Engineering:
Tube Products of India Ltd was established in 1955, in collaboration with Tube Products (Old Bury) Limited-UK, as a measure of backward integration with the bicycles plant.
Today, TPI is the most preferred supplier of precision tubes, Electric Resistance Welded (ERW) and Cold Drawn Welded (CDW), to major automotive companies in India and abroad. TPI is India's undisputed market leader in CDW tubes for the Automotive industry. It also has significant market presence in power plants, boiler, textile machinery, general engineering. It is the Market leader in Telescopic Front Fork Inner tubes and Cylinder bore tubes for shock absorber and gas spring applications, Propeller shaft tubes for Automotive segment. Other Speciality products include Rear Axle Tubes, Side Impact Beams, Tie Rods, Drag links, Heavy thick steering shafts and Hydraulic Cylinder tubes.

3) Metal Formed Products:
Established in 1965, TI Metal Forming is a pioneer and leader in precision value added sheet metal formed components. TIMF manufactures car door frames, window and guide channels, impact beams, hydro-formed parts, frames for various types of motor casings etc., For Railways, TIMF manufactures and supplies roll formed sections for wagons and coaches apart from sub-assemblies of sidewalls, end-walls and roof.

TIDC India – The Complete Chain Company. Incorporated in 1960 in collaboration with the global company from USA, it is now a wholly owned SBU of Tube Investments of India.
TIDCs chains find wide acceptance in variety of applications in the following industrial segments:
-General Engineering
-Construction Equipments
-Agricultural Machinery
-Automotive Industry
-Printing & Packaging
-Process Industries (Cement, Mining, Power)
-Material Handling Industries.

4) Technology:
Corporate technology center works on business driven R&D projects with specific focus in "metal forming", "thermal processing" technologies and the “engineering design” oriented towards products and process simulation and analysis.
TII is a pioneer today in innovating & engineering products for the future with proven expertise in:
   a) Modeling – Products & Processes – with stress analysis (FEA)
   b) Prototyping - Products & Processes
   c) Testing – Mechanical, Endurance, Corrosion and High Strain Rate testing
   d) Investigation – Optical (Micro & Macro structure), Scanning electron microscope, Micro                    hardness and Dye Penetrant test.

Subsidiaries:
1) Chola MS General Insurance Company Ltd
2) Cholamandalam Investment & Finance Company Ltd
3) Sedis
4) Shanthi Gears

Interesting Valuation Case:
Cholamandalam Investment & Finance Company is a listed company in Indian Stock Market, and is trading at a market cap of above 7000 Cr. As per the annual report of FY'14, TII holds 50% stakes in the company.
Apart from that, they have 74% stakes in Chola MS General Insurance Company. The company is not listed in Indian market, but as per the annual report, it is mentioned that company reported about 1855 Cr of Gross Written Premium in FY'14, and a net profit of 70 Cr. It reported 13% growth over last year. Hence can be concluded that it is also a good growth company with strong presence.
Over to minnows, Shanthi Gears is also trading with a market cap of 1000 Cr, where TII has about 70% stakes.

Now, looking at all these data of its subsidiaries only and keeping the core business aside, it seems TII would be a very big company with a very healthy market cap. However, to one's surprise, it is trading with a market cap of only 6000 Cr.
As we come to its standalone business, that is not small either. The company reported 3500 Cr sales last year, with a net profit of close to 100 Cr.

One of the reason for not moving up further might be lower margins that company is operating with. However, that should resolved with time, especially in developing country like India.
The product portfolio of their core business itself is outstanding, and should do well if India reverses its growth cycle, which seems to be happening.
The results of first half of this fiscal has been encouraging.
They have reported 12.4% growth in total income so far, over first six months of FY'14.
Net profit has gone up be 14.4%.
Annual EPS is expected to be around 20 in this fiscal, which makes the stock trading at around PE of 17, which might seem fair to many, right now, but with growing business, aided by its subsidiaries, the EPS should go up to 30 in coming 2 years or so, especially with growth cycle returning to normal.
The data is not the only positive. The management as seen above is highly trustworthy.
They are continuously looking at increasing their product portfolio further with few more engineering products.

All in all, one can conclude this as a company, giving a good case study of valuation, with strong management, and excellent future prospects.

Note:
This should not be considered as recommendation. This was just an interesting story which I wanted to present before all readers.
The decision to go with it or not, depends on reader, and I, by no means, will be able to help readers with that. My views are already presented above.