What’s Driving The Rally For Tube Investments’ Shares

Tube Investments of India Ltd. has scaled lifetime highs as the Murugappa Group company improved operational performance.

Shares of the maker of bicycles, metal-formed products and chains have surged more than 60 percent in the last 12 months, and the company is now valued at Rs 9,300 crore. The stock has gained more than 30 percent in the last one month alone.

Hived off in 2017 after a Murugappa Group restructuring, Tube Investments has reduced leverage and has healthy cash flows.

Here's a snapshot of why the company has performed well:

Diversified Revenue Stream: Engineering contributed the most (48 percent) to the company's consolidated revenue in financial year 2018-19, according to its investor presentation. That was followed by metal-formed products at 27 percent, bicycle manufacturing at 21 percent and gear and gear products at 4 percent.

Lower Operating Leverage: The company's leverage fell significantly in the first six months of 2019-20, compared with the year-ago period, as its operating performance improved. The company's debt-to-Ebitda ratio fell from 1.3 times in the first half of financial year 2018-19 to 0.5 times in the first six months of the ongoing fiscal.

Crisil Ltd. sees Tube Investments maintaining its operating leverage at less than two times over the medium term. The ratings agency also expects cash generation of Rs 300-350 crore per annum due to stable margins, and lower interest payouts would lower debt.

JM Financial Ltd., too, expects the company to become net debt-free in the next two-three quarters, reducing its interest costs.

Surplus Cash: Stable revenue growth and operating profitability at 10-10.5 percent led to healthy cash generation. The company's free cash flows in the first half of the ongoing fiscal jumped more than twofold over the corresponding previous period to Rs 154 crore.

Favourable Return Ratios: Tube Investments' return on capital employed—that measures the efficiency with which a company can employ its capital—improved since FY18 as profitability rose.

Brokerages JM Financial and Axis Capital highlighted a few other factors that may help the company.

• Continues to enjoy additional financial flexibility supported by Murugappa Group's strong franchise.
• Ability to raise funds from multiple sources at attractive rates of interest.
• Achieved a profit before tax margin of 9.5 percent in the first six months of the ongoing financial year against a target of 10-11 percent set for FY22-23.
• Expects more levers to improve profit before tax margin from current levels; targets profit before tax margin at more than 12 percent eventually.

Tube Investments is not only a consistent performer but also a best proxy for the revival in India's automobile volumes and industrial growth, Axis Capital said. The brokerage maintained a buy rating on the stock and raised target price to Rs 500 apiece from Rs 450 a share.

But Crisil Ratings said sluggish performance of the company's bicycle business, along with cyclical slowdown in the automobile sector, poses a risk.