Tube Investments: Weaker outlook for domestic auto business

12 Apr 2023 , 10:23 AM

Recommendation: Add

Target Price: Rs 2,689

Standalone EPS cut is also driven by increasing leverage to fund the Rs5.2 billion commitments, for foray into CDMO/API (Greenfield facility) and medical devices; even as material gains from these forays flow in only gradually.

Slowing domestic auto demand to hurt volumes

The Auto team at IIFL Capital Services has downgraded FY24 growth estimates with volume growth in MHCV, LCV, PV and 2W likely to taper down to 12% (15% earlier), 0% (5% earlier), 7% (10% earlier) and 10% (12% earlier) respectively. TIINDIA derives ~55% of standalone revenue from domestic auto with contribution of ~50% from 2W, ~25% each from PVs and CVs. Hence, FY24 growth for TIINDIA should be slower as well.

Non-domestic auto segments to offset weakness

The balance 45% of standalone revenue comprises exports (~16%), large dial tubes for off-road applications, rail coach sections, industrial chains and bicycles. Except bicycles, all the other segments have visibility of strong demand led by product portfolio expansion for global auto (exports), visible uptick in rail coach upgradation program and healthy manufacturing capex outlook for industrial chains. Key risk would be slowing global economy for exports.

Taking long-term bets in CDMO/API and medical devices

Recent announcements of foray into CDMO/API manufacturing (Rs2.85 billion commitment for a greenfield capacity) and acquisition of 67% stake in Lotus Surgical (Rs2.33 billion commitment, 33% to be held by Premji Invest) are unrelated to core business, and are targeting long-term opportunities, as per TI management. Immediate gains would be minimal; analysts at IIFL Capital Services expect SA net debt to inch up from Rs1.7 billion in December 2022 to ~Rs2.9 billion in FY23 and ~Rs4.45 billion in FY24.